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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 9.28.2011. Of the 50 magic portfolio stocks, 13 have been dropped from the list and 11 have been added, including 2 which were dropped and later returned to the list:

Ticker

Status

Market Cap ($Millions)

P/E (ttm)

P/B

Beta

(NASDAQ:ENTR)

Dropped 8.29.2011

319.9

5.11

1.45

2.61

(NASDAQ:MDCO)

Dropped 8.29.2011

709.6

6.85

1.98

0.66

(NASDAQ:MIPS)

Dropped 8.29.2011

227.4

17.12

2.92

1.31

(NYSE:NEP)

Dropped 8.29.2011

63.06

1.35

0.49

2.4

(NYSE:NOC)

Dropped 8.29.2011

13907.44

8.51

1.25

1.11

(NYSE:OSK)

Dropped 8.29.2011

1475.91

5.02

1.08

2.54

(NYSE:GNI)

Dropped 9.06.2011

159.9

7.71

12.81

0.37

(NASDAQ: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

(NYSE:KFY)

Dropped 9.20.2011

762.39

12.59

1.3

1.34

(NYSE:NSR)

Dropped 9.20.2011

1736.72

11.7

2.52

0.73

(NYSEARCA:LMLP)

Dropped 9.28.2011

81.59

8.53

1.99

1.43

(NASDAQ:GTIV)

Dropped 9.28.2011

172.32

4.05

0.28

1

(NASDAQ:ACAD)

Held Since 8.22.2011

73.92

3.5

2.26

2.46

(NASDAQ:AFAM)

Held Since 8.22.2011

191.11

7.25

0.95

1.07

(NYSE:AGX)

Held Since 8.22.2011

142.82

17.21

1.45

0.45

(NASDAQ:AMED)

Held Since 8.22.2011

502.75

5.96

0.54

0.77

(NASDAQ:APOL)

Held Since 8.22.2011

6339.53

15.84

4.68

0.19

(NASDAQ:CECO)

Held Since 8.22.2011

1307.96

7.78

1.39

0.96

(NASDAQ:CHKE)

Held Since 8.22.2011

123.25

15.49

9.44

1.05

(NASDAQ:CMTL)

Held Since 8.22.2011

722.55

12.57

1.08

0.34

(NASDAQ:CPLA)

Held Since 8.22.2011

505.85

8.74

2.68

0.67

(NASDAQ:CRAY)

Held Since 8.22.2011

196.62

7.04

1.41

1.44

(NASDAQ:DELL)

Held Since 8.22.2011

27454.98

7.95

3.27

1.39

(NYSE:DLB)

Held Since 8.22.2011

3735.81

12.88

2.26

0.95

(NYSE:DLX)

Held Since 8.22.2011

1121.04

7.39

4.23

2.02

(NYSE:EGY)

Held Since 8.22.2011

348.51

8.19

1.66

0.6

(NYSE:ESI)

Held Since 8.22.2011

1967.81

6.2

22.73

0.63

(NYSE:FRX)

Held Since 8.22.2011

9314.77

8.31

1.77

0.69

(NASDAQ:GTAT)

Held Since 8.22.2011

1552.6

7.98

5.98

1.32

(NYSE:HRB)

Held Since 8.22.2011

4565.22

10.92

3.18

0.6

(NASDAQ:KLAC)

Held Since 8.22.2011

6163.31

7.86

2.14

1.75

(NASDAQ:KLIC)

Held Since 8.22.2011

663.55

3.63

1.4

2.63

(NYSE: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

(NASDAQ:MANT)

Held Since 8.22.2011

1367.45

10.26

1.34

0.28

(NYSE:MDP)

Held Since 8.22.2011

1153.86

8.78

1.48

1.65

(NASDAQ:NVMI)

Held Since 8.22.2011

176.86

5.64

2.01

1.77

(NASDAQ:PDLI)

Held Since 8.22.2011

831.78

8.71

8.12

0.53

(NASDAQ:PETS)

Held Since 8.22.2011

219.18

12.45

2.55

0.43

(NASDAQ:PRSC)

Held Since 8.22.2011

143.96

8.54

1.48

1.85

(NYSE:PRX)

Held Since 8.22.2011

1082.15

N/A

2.05

0.72

(NASDAQ:PWER)

Held Since 8.22.2011

807.86

6.64

2.03

2.05

(NASDAQ:SNDK)

Held Since 8.22.2011

8944.66

7.01

1.39

1.74

(NASDAQ:STRA)

Held Since 8.22.2011

1149.14

9.98

29.56

0.63

(NYSE:TER)

Held Since 8.22.2011

2289.68

7.61

1.71

1.73

(NASDAQ:TNAV)

Held Since 8.22.2011

394.81

10.23

2.14

N/A

(NASDAQ:TSRA)

Held Since 8.22.2011

740.47

13.09

1.03

1.38

(NYSE:UIS)

Held Since 8.22.2011

741.31

11.86

N/A

3.63

(NASDAQ:USMO)

Held Since 8.22.2011

343.01

2.99

1.46

0.83

(NASDAQ: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

(NASDAQ:AMAT)

New 8.29.2011

15000.09

7.88

1.76

1.04

(NASDAQ:LRCX)

New 8.29.2011

4787.45

6.52

1.89

1.38

(NASDAQ:MNTA)

New 8.29.2011

883.03

4.51

2.65

1.35

(NASDAQ:MPAA)

New 8.29.2011

126.77

17.25

1.07

1.02

(NYSE:USNA)

New 8.29.2011

396.47

8.36

2.77

0.74

(NASDAQ:ASTX)

New 9.13.2011

202.27

7.79

1.06

0.95

(NASDAQ:CPIX)

New 9.13.2011

111.48

23.68

1.36

1.36

(NASDAQ:TRMS)

New 9.20.2011

49.95

2.72

0.92

0.69

(NYSE:VG)

Added Back 9.20.2011, Dropped 8.29.2011

589.31

N/A

N/A

1.47

(NASDAQ:MSFT)

Added Back 9.28.2011, Dropped 9.20.2011

216435.84

9.71

3.85

1.03

(NASDAQ:COOL)

New 9.28.2011

80.43

8.59

3.1

1.51

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 9.04, the mean price to book ratio has increased from 3.30 to 3.36, and the mean beta has decreased from 1.34 to 1.25.

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