If you want to enhance your likelihood of beating the market, one method is to select stocks that rank highly according to the "Magic Formula" criteria.
Designed by Joel Greenblatt (Trades, Portfolio), a well-known value investor and author of "The Little Book That Beats the Market," the Magic Formula ranks stocks based on a specific array of technical criteria. The earnings yield and the return on capital are the most important amid these technical criteria.
In Greenblatt's book, these two financial ratios are designed a little differently than normal. Greenblatt calculates the earnings yield as earnings before interest and taxes (Ebit) divided by the enterprise value, while the return on capital is Ebit divided by net fixed assets and working capital.
In addition to high values in these two financial ratios, Magic Formula stocks are further narrowed down to be U.S. stocks with a market capitalization exceeding $100 million, as businesses that do not hold these criteria have different capital structures. The Magic Formula also excludes financial and utility businesses for similar reasons.
The following three companies rank highly on the GuruFocus Magic Formula screener, a screener based on the Magic Formula criteria.
Citi Trends Inc
The first magic formula stock to consider is Citi Trends Inc (CTRN, Financial), a Savannah, Georgia-based fashion apparel, accessories and home goods retailer selling its products through more than 580 stores in urban and rural markets located in 33 states of the U.S.
The stock was trading at $84.80 per share at close on June 11 for a market capitalization of $784.73 million. As of the quarter that ended on April 30, 2021, it had an earnings yield of 11.53% and a return on capital of 39.85%.
Citi Trends Inc's earnings yield ranks better than 86.69% of 1,059 companies operating in the retail-cyclical industry, while its return on capital ratio ranks better than 84.91% of competitors.
The share price has risen by 440.13% over the past year to trade nearly 35% above the midpoint of the 52-week range of $14.55 to $111.44.
Currently, Citi Trends Inc pays a quarterly dividend of 8 cents per common share for a trailing 12-month and forward dividend yield of 0.38% as of June 11.
GuruFocus has assigned a score of 6 out of 10 for both the company's financial strength and for its profitability.
On Wall Street, the stock has a median recommendation rating of buy.
Gran Colombia Gold Corp
The second magic formula stock is Gran Colombia Gold Corp (TPRFF, Financial), a Toronto, Canada-based acquirer, developer and explorer of gold and silver properties located in Colombia.
The stock was trading at $4.10 per share at close on June 11 for a market capitalization of $406.39 million. As of the March 2021 quarter, it had an earnings yield of 57.80% and a return on capital of 218.57%.
Gran Colombia Gold Corp's earnings yield ranks higher than 98.18% of 2,421 companies operating in the metals and mining industry, while the return on capital ratio ranks better than 97.13% of 2,299 competitors.
The share price has fallen by more than 18% over the past year, now trading about 29.6% above the midpoint of the 52-week range of $4.01 to $6.61.
Currently, Gran Colombia Gold Corp pays a monthly dividend of 0.015 Canadian dollars ($0.012) per common share for a trailing 12-month dividend yield of 2.33% and a forward dividend yield of 3.64% as of June 11.
GuruFocus has assigned a score of 6 out of 10 for the company's financial strength and a score of 4 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of buy.
Zumiez Inc
The third magic formula stock to consider is Zumiez Inc (ZUMZ, Financial), a Lynnwood, Washington-based operator of 656 specialty stores in North America and 68 internationally, for the sale of apparel, footwear, accessories and hardgoods for men and women. The merchandise is offered under the names of Zumiez, Blue Tomato and Fast Times. The company is also selling its products through the e-commerce channel.
The stock was trading at $46.94 per share at close on June 11 for a market capitalization of $1.21 billion. As of the quarter that ended on April 30, 2021, it had an earnings yield of 15.70% and a return on capital of 34.87%.
Zumiez Inc's earnings yield ranks higher than 91% of 1,060 companies operating in the retail-cyclical industry, while the return on capital ratio ranks better than 84% of 1,055 competitors.
The share price has risen by 74.50% over the past year to trade about 32.35% above the midpoint of the 52-week range of $20.87 to $50.05.
Currently, Zumiez Inc does not pay dividends.
GuruFocus has assigned a score of 6 out of 10 for the company's financial strength and a score of 8 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of overweight.
Disclosure: I have no positions in any securities mentioned in this article.
