Joel Greenblatt is the founder of Gotham Capital, a hedge fund with extremely good returns. We like Greenblatt because he’s smart and not so secretive about his investment style. He’s authored two books, You Can Be A Stock Market Genius and The Little Book That Beats the Market.
In the The Little Book, Greenblatt describes a quantitative strategy – which he calls the "magic formula" -- to pick stocks. It’s actually a very simple quantitative stock ranking scheme. It uses return on capital and earnings yield as inputs. Return on capital is the metric that shows whether a business is a good one or not. Earnings yield is the metric that shows whether a company is cheap or not. Greenblatt suggests using these measures to identify good but cheap businesses, and buy them.
That’s the secret behind the "magic formula." In The Little Book, Greenblatt calculated hypothetical returns for the 1988-2004 period. The magic formula returned an average 30.8% per year, while the market return was 12.3% and the S&P 500 returned an average 12.4%.
Recently Greenblatt started implementing his “enhanced” magic formula, which was updated after rigorous quantitative research. Luckily for ordinary investors we have a delayed access to Greenblatt’s 13F portfolio which have stocks that are picked by the enhanced magic formula. Here are the top 50 stocks in Greenblatt’s 13F portfolio:
Company | Ticker | Return | Value (x1000) |
INTERDIGITAL INC | 4.2% | 7,453 | |
SANDISK CORP | -11.5% | 7,253 | |
MCGRAW HILL COS INC | MHP | 7.5% | 6,462 |
OSHKOSH CORP | -0.7% | 6,208 | |
LORILLARD INC | 10.5% | 6,031 | |
MEDICIS PHARMACEUTICAL CORP | MRX | 12.2% | 5,786 |
MICROSOFT CORP | -8.7% | 5,479 | |
IMPAX LABORATORIES INC | 19.3% | 5,204 | |
FOREST LABS INC | -2.7% | 5,197 | |
CAREER EDUCATION CORP | 4.1% | 5,187 | |
LENDER PROCESSING SERVICES INC | 10.8% | 4,826 | |
TERADYNE INC | 25.2% | 4,688 | |
VIROPHARMA | 12.1% | 4,669 | |
AEROPOSTALE INC | -2.6% | 4,605 | |
CUBIST PHARMACEUTICALS INC | 16.4% | 4,420 | |
EMCOR GROUP INC | 10.6% | 4,419 | |
RAYTHEON CO | 9.7% | 4,397 | |
APOLLO GROUP INC | 4.2% | 4,210 | |
G T SOLAR INTERNATIONAL | SOLR | 16.8% | 4,170 |
MEDNAX INC | -4.9% | 4,140 | |
REYNOLDS AMERICAN INC | 5.6% | 3,979 | |
NEUSTAR INC | -1.8% | 3,910 | |
VEECO INSTRUMENTS INC DEL | 18.3% | 3,758 | |
BLOCK H & R INC | 37.7% | 3,520 | |
DELL INC | 8.6% | 3,223 | |
GARMIN LTD | 9.1% | 3,187 | |
ACCENTURE LTD IRELAND | 3.8% | 2,971 | |
GAMESTOP CORP NEW | -7.4% | 2,795 | |
GILEAD SCIENCES INC | 11.1% | 2,766 | |
A O L INC | -20.3% | 2,726 | |
ENDO PHARMACEUTICALS | -2.2% | 2,306 | |
SOHU COM INC | 25.7% | 2,299 | |
ASTRAZENECA PLC | 5.1% | 2,289 | |
BUCKLE INC | -2.3% | 2,240 | |
UNISYS CORP | 24.1% | 2,168 | |
NOKIA CORP | -18.6% | 2,101 | |
DECKERS OUTDOOR CORP | 1.7% | 2,097 | |
WEIGHT WATCHERS INTL INC | 65.4% | 2,092 | |
SEAGATE TECHNOLOGY | -10.2% | 2,011 | |
AMEDISYS INC | 4.9% | 1,998 | |
GROUPE C G I INC | 17.2% | 1,996 | |
GLAXOSMITHKLINE PLC | -2.0% | 1,993 | |
CEPHALON INC | -7.9% | 1,944 | |
DEVRY INC DEL | 9.5% | 1,932 | |
ALTRIA GROUP INC | 3.7% | 1,909 | |
HARRIS CORP | 6.5% | 1,868 | |
LAM RESH CORP | 0.6% | 1,848 | |
S A I C INC | 6.2% | 1,844 | |
ARRIS GROUP INC | 8.9% | 1,820 | |
AMERISOURCEBERGEN CORP | 11.2% | 1,765 |
These 50 stocks returned 6.6% since the end of 2010, vs. SPY’s 3.6% return. Clearly, magic formula on steroids beats the market by an average of 1 percentage point per month. The best performing stock was WTW, returning more than 65% in less than three months. HRB returned more than 37%, beating the market by 34 percentage points. Ray Dalio’s Bridgewater and Andreas Halvorsen’s Viking Global were among the other hedge funds with HRB holdings. SOHU returned 26%, beating the SPY by 23 percentage points. John Griffin’s Blue Ridge had also SOHU in its portfolio at the end of December.
Teradyne was another stock with excellent performance, returning more than 25%. David Tepper’s Appaloosa had Teradyne in its portfolio as well. As one can see, hedge funds that utilize fundamental analysis also buy these stocks because they are mostly high quality bargain stocks. We will keep following Greenblatt’s new stock picks and performance.
Disclosure: I am long MSFT.
