Introduction
Magic Formula Stocks have a track-record of beating the market over time. When Greenblatt wrote about the magic formula investing process, he recommended going for stocks above $50 million in market capitalization. At VSG we run our screens with the minimum market cap at $30 million. Other than this, this screen exactly follows Greenblatt's magic formula.
Screen Details
This screen looks for small cap stocks between $30 million and $2 Billion in market capitalization with highest earnings yield and return on capital, as modified by Joel Greenblatt:
- Avoid Financials and Utilities
- Avoid ADRs
- Greenblatt Earnings Yield, pick from the highest
- Greenblatt ROC, pick from the highest
We have limited the results to the top 10 stocks. The stocks are ranked with 50% weight to Greenblatt Earnings Yield and 50% weight to Greenblatt ROC.
The Screen Results
Stock | Company | Sector | Greenblatt Earnings Yield | Greenblatt ROC |
|---|---|---|---|---|
BPT | BP Prudhoe Bay | Energy | 51.9% | 8240.8% |
HCC | Warrior Met Coal | Basic Materials | 41.7% | 44.5% |
HEAR | Turtle Beach | Technology | 35.6% | 49.7% |
INVA | Innoviva | Healthcare | 17.8% | 68.1% |
MSB | Mesabi Trust | Basic Materials | 13.4% | 163.4% |
NRT | North European Oil | Energy | 12.9% | 351.7% |
PBT | Permian Basin Royalty | Energy | 12.1% | 685.5% |
PRT | PermRock Royalty Trust | Energy | 15.7% | 1251.7% |
RMR | RMR Group | Real Estate | 33.3% | 81.4% |
SIGA | SIGA Technologies | Healthcare | 85.8% | 292.5% |
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Notes and Observations
The Magic Formula Screener is non-discretion based. This means you just pick the top stocks and buy them mechanically. If this is what you want to do, just use the stocks listed above. If you wish to add a little bit more discretion, you can run these stocks through an additional filter.
Here, I did a quick Price/Graham Number calculation on these stocks, and find the following stocks to have the P/GN below 1:
- HCC: P/GN = 0.3. Selling at very low multiples with P/E Ratio at 1.6. Coal may be on its way out, but perhaps this can be a great cigar-butt stock. Interested enough to consider it further.
- HEAR: P/GN = 0.9. CEO transition and earnings decline. Looks cheap and added to my further review list.
- INVA: P/GN = 0.9. I avoid bio-tech stocks as it is out of my circle of competence
- PRT: P/GN = 0.5. Avoid oil for now.
- SIGA: P/GN= 0.5. I avoid early stage pharmaceutical companies as it is out of my circle of competence.
Ending Note
We have 2 stocks from the list to review further. Despite these stocks being the result of the magic formula screener, which is meant to be a turnkey screener, I do intend to evaluate these stocks with my own value investing philosophy. I suggest you do so too.
