Joel Greenblatt (Trades, Portfolio) introduced the investing world to the "Magic Formula" when he published his 2005 book, "The Little Book That Beats the Market." The idea behind the Magic Formula is to apply a simple mathematical formula to find profitable businesses that trade at bargain prices.
The formula ranks companies based on the combination of two metrics: earnings yield and return on capital. The earnings yield, which is defined as earnings before interest and taxes divided by enterprise value, measures how much the company earns compared to how much the stock is valued by the market. The return on capital, which is defined as Ebit divided by the sum of net fixed assets and net working capital, measures how much a company earns compared to what it spends to produce those earnings.
Below are three companies that have gained new spots on GuruFocus' Magic Formula screener, which is based on Greenblatt's criteria, as of their most recent quarterly earnings results. Since these companies are new on the screener results, investors may need to research them more carefully.
One new Magic Formula company is Immersion Corp. (IMMR, Financial), a technology company based in San Jose, California. It is a developer and licensor of touch feedback (haptic) technology for the automotive, gaming and technology industries.
The company has an earnings yield of only 0.87% but a return on capital of 30.72%. The business predictability rating is one out of five stars.
On March 9, shares of Immersion traded around $10.38 for a market cap of $315.92 million and a price-earnings ratio of 47.74, which is higher than the company's 10-year median of 38.37. According to the GuruFocus Value chart, the stock is significantly overvalued.
As shown in the chart below, gurus have been buying the stock in recent quarters. Paul Tudor Jones (Trades, Portfolio) owns 0.24% of shares outstanding, while Steven Cohen (Trades, Portfolio) holds 0.07%.
The company has a financial strength rating of 6 out of 10 and a profitability rating of 3 out of 10. The Piotroski F-Score of 5 out of 9 and Altman Z-Score of 5.02 both suggest stable financials. The operating margin of 7.29% and net margin of 17.73% are greatly outperforming their respective industry medians.
Immersion's business is all about developing new technologies to enable humans to interact with computers. It is one of the leading companies in this niche sector, which puts it in an advantageous position to benefit from the emerging popularity of technology trends such as artificial intelligence and virtual reality.
Another company that recently made the Magic Formula list is Entain PLC (GMVHY, Financial), a British sports betting and gambling company that owns the brands Bwin, Coral, Ladbrokes, PartyPoker and Sportingbet.
The company has an earnings yield of 2.41%, a return on capital of 54.4% and a business predictability rating of three out of five stars.
On March 9, shares of Entain traded around $20.29 for a market cap of $11.87 billion and a price-earnings ratio of 150.81, which is higher than the company's 10-year median of 13.49. According to the GF Value chart, the stock is a possible value trap as the price is too far below the intrinsic value estimate.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The Altman Z-Score of 1.6 indicates some financial distress, though the Piotroski F-Score of 6 out of 9 is typical of a financially stable company. The three-year revenue growth rate is 33.3% while the three-year Ebitda growth rate is 48.1%.
Through both organic growth and acquisitions, Entain has expanded rapidly in recent years to become one of the largest publicly listed sports betting and gaming groups in the world, through both its online and retail channels. Unlike many companies that pursue such a strategy, Entain has carried this off without taking on amounts of debt that are too crippling, which bodes well for future growth potential.
Germany-based GEA Group AG (GEAGY, Financial) is another new Magic Formula stock. The company aims to provide sustainable solutions and services primarily to companies operating in the food, beverages and pharmaceuticals sectors.
The company has an earnings yield of 4.25%, a return on capital of 30.60% and a business predictability rating of one out of five stars.
On March 9, shares of GEA Group traded around $37.75 for a market cap of $6.81 billion and a price-earnings ratio of 60.17, which is higher than the company's 10-year median of 11.75. According to the GF Value chart, the stock is modestly overvalued.
The company has a financial strength rating of 6 out of 10 and a profitability rating of 6 out of 10. The Piotroski F-Score of 7 out of 9 and Altman Z-Score of 2.05 indicate the company is very unlikely to face financial troubles. The return on invested capital is typically close to the weighted average cost of capital, indicating growth neither creates nor destroys profitability.
GEA Group has plenty of room to grow as the world increasingly shifts toward a more environmentally sustainable future. In pursuit of its stated goal of "engineering for a better world," the company helps its corporate customers reduce carbon emissions, plastic usage and food waste. Beyond environmental concerns, it also provides technology and solutions to improve production efficiency for higher profitability.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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