The Magic Formula is Joel Greenblatt’s successful attempt to quantify Warren Buffett’s principle of buying good companies at bargain prices. This strategy equally ranks companies based on return on capital and earnings yield.
By combining the top ranked stocks based on both metrics, the screen finds stocks that are highly profitable yet trading at low prices. In Greenblatt’s calculations, the Magic Formula returned over 30% annually from 1988 to 2004.
Source
Joel Greenblatt originally introduced the Magic Formula in The Little Book That Beats the Market in 2005. He came out with an updated edition in 2010 titled The Little Book That Still Beats the Market.
The book provides a simple step-by-step guide which allows anyone to implement the Magic Formula strategy.
Magic Formula Results
Premium Membership: The 200 stocks meeting all the core criteria with the lowest combined rank are displayed in spreadsheet format. Premium screens can be sorted by fundamentals.
Core Criteria
- EBIT (TTM) > 0
- Currency = USD
- Sector ≠ Financials, Utilities
Valuation Factors
- Rank Stocks by Earnings Yield from Highest to Lowest
- Rank Stocks by Return on Capital from Highest to Lowest
- Combine rankings for Earnings Yield with rankings for Return on Capital (see example)
- Earnings Yield = EBIT (TTM) / Enterprise Value
- Return on Capital = EBIT (TTM) / (Net Property, Plant, & Equipment + Net Working Capital)
*Enterprise Value = Market Cap + Total Debt + Minority Interest + Preferred Stock – Cash, Cash Equivalents and Short-term Investments
*EBIT = Earnings Before Interest & Taxes
Implementation
Greenblatt recommends buying the top 20 – 30 stocks and holding for one year before rebalancing the portfolio. Another approach is to build a 20 – 30 stock portfolio over time and rebalance stocks individually after owning for a year.
Follow along with our corresponding Shadow Stock Portfolio as it systematically invests based on the results of this stock screen.
0
0
0
Let's connect! 
