For a higher chance to beat the market, one method investors could try is to look for stocks that rank highly on GuruFocus' "Magic Formula" screener, which is based on Joel Greenblatt (Trades, Portfolio)'s Magic Formula criteria.
Created by Joel Greenblatt (Trades, Portfolio), a successful 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 most important being the earnings yield and return on capital.
In Greenblatt's book, these two financial ratios are defined 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 regarding these two financial ratios, Magic Formula stocks are further narrowed down to be U.S. companies with a market capitalization of more than $100 million, as businesses that do not meet these criteria have different capital structures. Also, the Magic Formula does not take into consideration financial and utility businesses for similar reasons.
Below are three stock picks that rank highly on the GuruFocus Magic Formula screener, which is based on Greenblatt's formula.
The first stock to consider is Immersion Corporation (IMMR, Financial), a San Francisco, California-based designer of haptic technologies for mobile communications, wearable devices, various consumer electronics, consoles and PC gaming. These technologies are also employed in the automotive industry and sold on global medical markets.
The stock closed at $5.71 per share on Dec. 3 for a market capitalization of $188.58 million. GuruFocus indicates the company’s earnings yield is 15.87% (versus the industry median of -1.30%) and its return on capital is 1,058.12% (versus the industry median of 17.56%).
The share price has fallen by 32.25% over the past year to trade significantly below the midpoint of the 52-week range of $5.60 to $16.64.
Currently, Immersion Corporation does not pay a dividend.
Omnicom Group Inc
The stock closed at $69.04 per share on Dec. 3 for a market capitalization of $14.68 billion. GuruFocus data shows the company’s earnings yield is 12.53% (versus the industry median of 2.4%) and the return on capital is 131.61% (versus the industry median of 13.35%).
The share price has risen by 7.37% over the past year to trade significantly below the midpoint of the 52-week range of $59.05 cents to $86.38.
Currently, Omnicom Group Inc pays quarterly dividends. The next distribution, $0.70 per share (in line with the previous payment) is scheduled to be issued on Jan. 11, 2022. The forward dividend yield is 4.06% as of the writing of this article.
Sleep Number Corp
The stock closed at $77.12 per share on Dec. 3 for a market capitalization of $1.75 billion. The company has an earnings yield of 8.83% (versus the industry median of 6.09%) and a return on capital of 54.29% (versus the industry median of 16.39%).
The share price has risen by 2.12% over the past year to trade significantly below the midpoint of the 52-week range of $71.73 to $151.43.
Sleep Number Corp is not distributing regular dividends.