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5 High-Quality 'Magic Formula' Retailers

These names have earned a place on Greenblatt's Magic Formula list

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Dec 08, 2021
Summary
  • Joel Greenblatt's Magic Formula mainly relies on the earnings yield and return on capital to evaluate stocks
  • Stocks that meet these criteria are generating strong earnings and have profitable business structures
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Joel Greenblatt (Trades, Portfolio) introduced the investing world to the “Magic Formula” when he published his bestselling book, “The Little Book That Beats the Market,” in 2005. 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 primarily based on two metrics: earnings yield and return on capital. The earnings yield, which Greenblatt defines as earnings before interest and taxes (Ebit) 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 calculated 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.

As retail spending ramps up for the holiday season, here are five retailers that rank highly on GuruFocus’ Magic Formula screener, a screener based on Greenblatt’s criteria. These companies are also profitable and have good financial strength.

Brilliant Earth Group

San Francisco-based Brilliant Earth Group Inc. (

BRLT, Financial) is a jewelry company that is certified as carbon-free and claims to ethically source all of its diamonds and other gemstones. It accomplishes this by recycling old gold and jewelry rather than mining it directly.

Brilliant Earth has a return on capital of 507.73%, which outperforms 98% of industry peers. Meanwhile, its earnings yield of 25.89% is beating 96% of other retailers.

The company has a financial strength rating of 4 out of 10, driven by a cash-debt ratio of 2.55 and an interest coverage ratio of 7.56. Since it’s relatively new to the public markets, not much information is available about the company’s balance sheet, but it does have an operating margin of 10.56% and a net margin of 8.56%, indicating profitability.

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On Dec. 8, shares of Brilliant Earth traded around $19.43 for a market cap of $176.24 million and a price-earnings ratio of 11.44. Since going public near the end of this past September, the stock has gained 13%.

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Live Ventures

Live Ventures Inc. (

LIVE, Financial) is a holding company that focuses on acquiring U.S.-based middle market growth companies, such as carpet mill Marquis Industries and sustainability-focused appliance seller ApplianceSmart.

Live Ventures has a return on capital of 42.7%, which is higher than 84% of industry peers, and an earnings yield of 32.65%, which is better than 96% of other retailer companies.

The company’s financial strength rating is 4 out of 10. The Altman Z-Score of 2.58 and Piotroski F-Score of 9 out of 9 indicate a very healthy financial situation. Its profitability is rated 5 out of 10. The return on invested capital has recently surpassed the weighted average cost of capital, meaning the company is now creating value for shareholders.

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Shares of Live Ventures traded around $34.90 on Dec. 8 for a market cap of $54.82 million and a price-earnings ratio of 4.10. The Peter Lynch chart shows the stock to be trading below its intrinsic value but in line with its median historical valuation.

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Hibbett

Hibbett Inc. (

HIBB, Financial) is the holding company for Hibbett Sports, an American sports retailer headquartered in Birmingham, Alabama. Hibbett’s stores offer a full line of sporting goods, and its social media marketing efforts have driven a new wave of success.

Hibbett’s return on capital is 55.24% and its earnings yield is 18.28%, outperforming 88% and 91% of other retailers.

The company’s financial strength rating is 7 out of 10. The Altman Z-Score of 6.7 and interest coverage ratio of 1,073.02 show a fortress-like balance sheet. The profitability rating is 8 out of 10 on the back of a three-year revenue per share growth rate of 20.7% and a three-year Ebitda per share growth rate of 23.9%.

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On Dec. 8, shares of Hibbett traded around $74.63 for a market cap of $1.02 billion and a price-earnings ratio of 6.95. The GF Value chart rates the stock as significantly overvalued, since it experienced many years of decline before the recent revival.

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EBay

Based in San Jose, California, eBay Inc. (

EBAY, Financial) is an e-commerce company that facilitates consumer-to-consumer and business-to-consumer sales through its website. Once famous for its auction listings, this type of selling is now less prominent than direct listings even on eBay.

The return on capital for eBay is 232.15%, which is higher than 96% of retailers. The earnings yield of 10.9% is outperforming 78% of the industry.

GuruFocus gives the company a financial strength rating of 5 out of 9 on the back of a strong cash-debt ratio of 1.57 and a Piotroski F-Score of 7 out of 9. The profitability rating is 8 out of 9. The ROIC is typically higher than the WACC, indicating the company is creating value for shareholders.

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On Dec. 8, shares of eBay traded around $66.59 for a market cap of $41.70 billion and a price-earnings ratio of 3.65. The GF Value chart gives the stock a fairly valued rating.

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Dick's Sporting Goods

Dick's Sporting Goods Inc. (

DKS, Financial) is an American sporting goods retail company based in Coraopolis, Pennsylvania. It offers a wide selection of sports gear, equipment, apparel and footwear, and was able to leverage its financial strength to take on more debt and drive growth in 2020.

Dick’s has a return on capital of 51.4%, which beats 87% of industry peers. Meanwhile, the company’s earnings yield is 16.92%, outperforming 89% of other retailers.

The company’s financial strength rating is 5 out of 10, with a Piotroski F-Score of 8 out of 9 and an interest coverage ratio of 34.07. The operating margin has climbed to 15.28% and the net margin has grown to 11.52%, demonstrating how the company has improved its profitability.

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Shares of Dick’s traded around $110.20 on Dec. 8 for a market cap of $9.55 billion and a price-earnings ratio of 8.54. The Peter Lynch chart shows that the company’s earnings have spiked faster than its stock price, so it trades below both its intrinsic value line and its median historical valuation line.

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