Tracking Joel Greenblatt's Magic Formula Portfolio

Joel Greenblatt has proposed a stock screen for which he has reported enviable results. He reported an annual 30.8% return for his “Magic Formula” in his book, “The Little Book that Beats the Market.” Since publishing his book, his strategy has performed well, though many analysts who have followed the “Magic Formula” have not seen 30.8% annual returns, but have seen outperformance from this strategy. His results are particularly interesting because his picks are not subjective: they are based on a simple ranking of earnings yield (EBIT/EV) and return on capital.

How rapidly are the Magic Formula stocks added to and dropped from the list? Should an investor add many stocks at once or a few gradually, to skim the best picks over time? In order to kick the tires, I wanted to see how the list of top 50 Magic Formula stocks changes week over week. I generated the portfolio on 8.22.2011, and checked on 8.29.2011, 9.06.2011, and again on 9.13.2011. Of the 50 Magic Portfolio stocks present three weeks ago, 10 dropped from the list and 10 were added:

Ticker	Status	Market Cap ($Millions)	P/E (ttm)	P/B	Beta
ENTR	Dropped 8.29.2011	319.9	5.11	1.45	2.61
MDCO	Dropped 8.29.2011	709.6	6.85	1.98	0.66
MIPS	Dropped 8.29.2011	227.4	17.12	2.92	1.31
NEP	Dropped 8.29.2011	63.06	1.35	0.49	2.4
NOC	Dropped 8.29.2011	13907.44	8.51	1.25	1.11
OSK	Dropped 8.29.2011	1475.91	5.02	1.08	2.54
VG	Dropped 8.29.2011	589.31	N/A	N/A	1.47
GNI	Dropped 9.06.2011	159.9	7.71	12.81	0.37
MEDW	Dropped 9.13.2011	81.75	16.06	1.56	0.71
SUPG	Dropped 9.13.2011	131.12	7.93	1.05	1.13
ACAD	Held Since 8.29.2011	73.92	3.5	2.26	2.46
AFAM	Held Since 8.29.2011	191.11	7.25	0.95	1.07
AGX	Held Since 8.29.2011	142.82	17.21	1.45	0.45
AMED	Held Since 8.29.2011	502.75	5.96	0.54	0.77
APOL	Held Since 8.29.2011	6339.53	15.84	4.68	0.19
CECO	Held Since 8.29.2011	1307.96	7.78	1.39	0.96
CHKE	Held Since 8.29.2011	123.25	15.49	9.44	1.05
CMTL	Held Since 8.29.2011	722.55	12.57	1.08	0.34
CPLA	Held Since 8.29.2011	505.85	8.74	2.68	0.67
CRAY	Held Since 8.29.2011	196.62	7.04	1.41	1.44
DELL	Held Since 8.29.2011	27454.98	7.95	3.27	1.39
DLB	Held Since 8.29.2011	3735.81	12.88	2.26	0.95
DLX	Held Since 8.29.2011	1121.04	7.39	4.23	2.02
EGY	Held Since 8.29.2011	348.51	8.19	1.66	0.6
ESI	Held Since 8.29.2011	1967.81	6.2	22.73	0.63
FRX	Held Since 8.29.2011	9314.77	8.31	1.77	0.69
GTAT	Held Since 8.29.2011	1552.6	7.98	5.98	1.32
HRB	Held Since 8.29.2011	4565.22	10.92	3.18	0.6
KFY	Held Since 8.29.2011	762.39	12.59	1.3	1.34
KLAC	Held Since 8.29.2011	6163.31	7.86	2.14	1.75
KLIC	Held Since 8.29.2011	663.55	3.63	1.4	2.63
LMLP	Held Since 8.29.2011	81.59	8.53	1.99	1.43
LPS	Held Since 8.29.2011	1416.24	6.54	3.21	0.97
LTXC	Held Since 8.29.2011	322.42	5.37	1.44	2.57
MANT	Held Since 8.29.2011	1367.45	10.26	1.34	0.28
MDP	Held Since 8.29.2011	1153.86	8.78	1.48	1.65
MSFT	Held Since 8.29.2011	216435.84	9.71	3.85	1.03
NVMI	Held Since 8.29.2011	176.86	5.64	2.01	1.77
PDLI	Held Since 8.29.2011	831.78	8.71	8.12	0.53
PETS	Held Since 8.29.2011	219.18	12.45	2.55	0.43
PRSC	Held Since 8.29.2011	143.96	8.54	1.48	1.85
PRX	Held Since 8.29.2011	1082.15	N/A	2.05	0.72
PWER	Held Since 8.29.2011	807.86	6.64	2.03	2.05
SNDK	Held Since 8.29.2011	8944.66	7.01	1.39	1.74
STRA	Held Since 8.29.2011	1149.14	9.98	29.56	0.63
TER	Held Since 8.29.2011	2289.68	7.61	1.71	1.73
TNAV	Held Since 8.29.2011	394.81	10.23	2.14	N/A
TSRA	Held Since 8.29.2011	740.47	13.09	1.03	1.38
UIS	Held Since 8.29.2011	741.31	11.86	N/A	3.63
USMO	Held Since 8.29.2011	343.01	2.99	1.46	0.83
VECO	Held Since 8.29.2011	1531.76	5.98	1.78	2.44
VPHM	Held Since 8.29.2011	1498.13	12.65	1.65	1.33
AMAT	New 8.29.2011	15000.09	7.88	1.76	1.04
LRCX	New 8.29.2011	4787.45	6.52	1.89	1.38
MNTA	New 8.29.2011	883.03	4.51	2.65	1.35
MPAA	New 8.29.2011	126.77	17.25	1.07	1.02
USNA	New 8.29.2011	396.47	8.36	2.77	0.74
NSR	New 9.06.2011	1736.72	11.7	2.52	0.73
ASTX	New 9.13.2011	202.27	7.79	1.06	0.95
CPIX	New 9.13.2011	111.48	23.68	1.36	1.36

Click to enlarge

Buying 50 stocks all at once on 8.29.2011, or waiting to buy them on 9.13.2011, would have had small impact on the portfolio’s overall attributes. The mean price-to-earnings ratio has increased from 8.47 to 9.30, the mean price-to-book ratio has increased from 3.30 to 3.33, and the mean beta has decreased from 1.34 to 1.24. As mentioned before, the 50-member portfolio would have differed by 10 names.

This study will continue weekly to observe the number of stocks that are added or taken from this portfolio. Changes could depend on various factors including broad market volatility, quarterly reports, or macro events. Time will tell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.