Seeking Alpha
Deep value, long/short equity, event-driven, research analyst
Profile| Send Message|
( followers)  

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.

Though I am not yet a proponent of this investment strategy, I am interested in how it works and how a “Magic Formula” allocation could fit into an investor’s portfolio. Historically, this strategy results in a beta of roughly 1 (1.05) and a blend of value and growth. Since there is no value tilt, a portfolio based on the “Magic Formula” could have the potential to be an investor’s core holding.

How rapidly are the Magic Formula stocks added to and dropped from the list? 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 every week since, through 9.20.2011. Of the 50 magic portfolio stocks, 12 have been dropped from the list, 10 have been added, including 1 that had been dropped has returned to the list:

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

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

KFY

Dropped 9.20.2011

762.39

12.59

1.3

1.34

MSFT

Dropped 9.20.2011

216435.84

9.71

3.85

1.03

NSR

Dropped 9.20.2011

1736.72

11.7

2.52

0.73

ACAD

Held Since 8.22.2011

73.92

3.5

2.26

2.46

AFAM

Held Since 8.22.2011

191.11

7.25

0.95

1.07

AGX

Held Since 8.22.2011

142.82

17.21

1.45

0.45

AMED

Held Since 8.22.2011

502.75

5.96

0.54

0.77

APOL

Held Since 8.22.2011

6339.53

15.84

4.68

0.19

CECO

Held Since 8.22.2011

1307.96

7.78

1.39

0.96

CHKE

Held Since 8.22.2011

123.25

15.49

9.44

1.05

CMTL

Held Since 8.22.2011

722.55

12.57

1.08

0.34

CPLA

Held Since 8.22.2011

505.85

8.74

2.68

0.67

CRAY

Held Since 8.22.2011

196.62

7.04

1.41

1.44

DELL

Held Since 8.22.2011

27454.98

7.95

3.27

1.39

DLB

Held Since 8.22.2011

3735.81

12.88

2.26

0.95

DLX

Held Since 8.22.2011

1121.04

7.39

4.23

2.02

EGY

Held Since 8.22.2011

348.51

8.19

1.66

0.6

ESI

Held Since 8.22.2011

1967.81

6.2

22.73

0.63

FRX

Held Since 8.22.2011

9314.77

8.31

1.77

0.69

GTAT

Held Since 8.22.2011

1552.6

7.98

5.98

1.32

HRB

Held Since 8.22.2011

4565.22

10.92

3.18

0.6

KLAC

Held Since 8.22.2011

6163.31

7.86

2.14

1.75

KLIC

Held Since 8.22.2011

663.55

3.63

1.4

2.63

LMLP

Held Since 8.22.2011

81.59

8.53

1.99

1.43

LPS

Held Since 8.22.2011

1416.24

6.54

3.21

0.97

LTXC

Held Since 8.22.2011

322.42

5.37

1.44

2.57

MANT

Held Since 8.22.2011

1367.45

10.26

1.34

0.28

MDP

Held Since 8.22.2011

1153.86

8.78

1.48

1.65

NVMI

Held Since 8.22.2011

176.86

5.64

2.01

1.77

PDLI

Held Since 8.22.2011

831.78

8.71

8.12

0.53

PETS

Held Since 8.22.2011

219.18

12.45

2.55

0.43

PRSC

Held Since 8.22.2011

143.96

8.54

1.48

1.85

PRX

Held Since 8.22.2011

1082.15

N/A

2.05

0.72

PWER

Held Since 8.22.2011

807.86

6.64

2.03

2.05

SNDK

Held Since 8.22.2011

8944.66

7.01

1.39

1.74

STRA

Held Since 8.22.2011

1149.14

9.98

29.56

0.63

TER

Held Since 8.22.2011

2289.68

7.61

1.71

1.73

TNAV

Held Since 8.22.2011

394.81

10.23

2.14

N/A

TSRA

Held Since 8.22.2011

740.47

13.09

1.03

1.38

UIS

Held Since 8.22.2011

741.31

11.86

N/A

3.63

USMO

Held Since 8.22.2011

343.01

2.99

1.46

0.83

VECO

Held Since 8.22.2011

1531.76

5.98

1.78

2.44

VPHM

Held Since 8.22.2011

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

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

GTIV

New 9.20.2011

172.32

4.05

0.28

1

TRMS

New 9.20.2011

49.95

2.72

0.92

0.69

VG

Added Back 9.20.2011, Dropped 8.29.2011

589.31

N/A

N/A

1.47

These changes have had very small impacts on the portfolio’s overall attributes. The mean price to earnings ratio has increased from 8.47 to 8.92, the mean price to book ratio has decreased from 3.30 to 3.26, and the mean beta has decreased from 1.34 to 1.24.

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.

Source: Weekly Stocks Dropped From And Added To Greenblatt's Magic Formula Portfolio