In North America, the Greenblatt Magic Formula is still our most popular screen. This screen was created by Joel Greenblatt, one of the most successful hedge fund managers of his generation. He started Gotham Capital in 1985 and managed to compound his capital at 50% per year from 1985 until 1994. Some tips on how he managed to achieve this can be found in his bestseller 'You can be a stock market genius', a book I highly recommend.
The strategies explained in this book are not available to everyone, and Greenblatt wanted to design a simple strategy that would give all investors a chance of beating the market. In his second bestseller, 'The little book that beats the market', a book that can be read in just a few hours and is written in very simple words, he introduced his magic formula. Greenblatt explains how investors can outperform the popular market averages by simply and systematically applying a formula that seeks out good businesses when they are available at bargain prices. This magic formula is based on 2 ratios: Earnings Yield and ROIC. The strategy is to rank all companies by this magic formula and invest in the top 20-30. These positions should be held for 1 year and the same process should be repeated to select the portfolio the following year. This should be repeated during a period of 3 to 5 years.
More details about this screener can be found by clicking here.
Obtaining the Greenblatt Magic Formula screen for North American stocks is very simple using our value stock screener. I first selected the template screen and applied the following additional filters:
- I only selected companies with a primary listing on stock markets in North America (United States and Canada)
- I filtered out companies that did not post any quarterly results ending in the last 6 months.
- I set a minimum daily trading value of 10K Euro.
- I selected all sectors but unchecked financial companies and utilities. Additionally I filtered out oil & gas companies and materials.
- I selected the following stock markets: CA - Toronto stock exchange; CA - TSX venture exchange; US - Nyse arca; US - Nyse amex equities; US - Nasdaq capital market; US - Nasdaq/ngs (global select market); US - Nasdaq/nms (global market); MX - Mexican stock exchange. I made sure not to include the OTC markets and pink sheets.
The top 15 companies that came up are shown in the screenshot above. Here are some of the companies in this list:
- PDL Biopharma manages a portfolio of patents and royalty assets, consisting of its Queen et al. patents, license agreements with various biotechnology and pharmaceutical companies, and royalty and other assets acquired.
- Pilgrim's Pride Corporation is the largest chicken producer in the United States and Puerto Rico and the second-largest chicken producer in Mexico.
- Photon Control provides measurement technologies mainly for the oil & gas industry.
- King Digital Entertainment is an internet game company, most known for the addictive Candy Crush. Update 3 Nov 2015: 6 days after writing the article, Activision Blizard agreed to buy King Digital for $18 per share, 20% above the stock price at the time of writing the article. This is luck but at the same time not unusual. Companies showing at the top of the screener have sound businesses generating significant revenues but at the same their stock price is quite often under pressure. These companies are ideal prey for corporate takeover.
- Yellow Pages Limited is the company behind the Canadian yellow pages and a host of other websites.
The full list of stocks can be found in the screenshot. As opposed to other sites, our screener only uses high quality data from a very reliable source and we refresh this data twice a week so you always have the latest list. We also cover 40 countries and more than 65 stock markets.
In a next article we will focus again on the Greenblatt formula, but we will combine it with the Piotroski score. Studies have shown that this slightly improves yearly returns.