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 10.04.2011. Of the 50 magic portfolio stocks, 16 have been dropped from the list at some point, 11 have been added, and 4 which were dropped and later returned to the list:
Ticker | Status | Market Cap ($Millions) | P/E (ttm) | P/B | Beta |
Dropped 8.29.2011 | 319.9 | 5.11 | 1.45 | 2.61 | |
Dropped 8.29.2011 | 709.6 | 6.85 | 1.98 | 0.66 | |
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 |
Dropped 8.29.2011 | 13907.44 | 8.51 | 1.25 | 1.11 | |
Dropped 8.29.2011 | 1475.91 | 5.02 | 1.08 | 2.54 | |
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 |
Dropped 9.20.2011 | 762.39 | 12.59 | 1.3 | 1.34 | |
Dropped 9.20.2011 | 1736.72 | 11.7 | 2.52 | 0.73 | |
Dropped 9.28.2011 | 81.59 | 8.53 | 1.99 | 1.43 | |
Dropped 10.4.2011 | 123.25 | 15.49 | 9.44 | 1.05 | |
Dropped 10.4.2011 | 1121.04 | 7.39 | 4.23 | 2.02 | |
Dropped 10.4.2011 | 1153.86 | 8.78 | 1.48 | 1.65 | |
Dropped 10.4.2011 | 143.96 | 8.54 | 1.48 | 1.85 | |
Dropped 10.4.2011 | 111.48 | 23.68 | 1.36 | 1.36 | |
Held Since 8.22.2011 | 73.92 | 3.5 | 2.26 | 2.46 | |
Held Since 8.22.2011 | 191.11 | 7.25 | 0.95 | 1.07 | |
Held Since 8.22.2011 | 142.82 | 17.21 | 1.45 | 0.45 | |
Held Since 8.22.2011 | 502.75 | 5.96 | 0.54 | 0.77 | |
Held Since 8.22.2011 | 6339.53 | 15.84 | 4.68 | 0.19 | |
Held Since 8.22.2011 | 1307.96 | 7.78 | 1.39 | 0.96 | |
Held Since 8.22.2011 | 722.55 | 12.57 | 1.08 | 0.34 | |
Held Since 8.22.2011 | 505.85 | 8.74 | 2.68 | 0.67 | |
Held Since 8.22.2011 | 196.62 | 7.04 | 1.41 | 1.44 | |
Held Since 8.22.2011 | 27454.98 | 7.95 | 3.27 | 1.39 | |
Held Since 8.22.2011 | 3735.81 | 12.88 | 2.26 | 0.95 | |
Held Since 8.22.2011 | 348.51 | 8.19 | 1.66 | 0.6 | |
Held Since 8.22.2011 | 1967.81 | 6.2 | 22.73 | 0.63 | |
Held Since 8.22.2011 | 9314.77 | 8.31 | 1.77 | 0.69 | |
Held Since 8.22.2011 | 1552.6 | 7.98 | 5.98 | 1.32 | |
Held Since 8.22.2011 | 4565.22 | 10.92 | 3.18 | 0.6 | |
Held Since 8.22.2011 | 6163.31 | 7.86 | 2.14 | 1.75 | |
Held Since 8.22.2011 | 663.55 | 3.63 | 1.4 | 2.63 | |
Held Since 8.22.2011 | 1416.24 | 6.54 | 3.21 | 0.97 | |
Held Since 8.22.2011 | 322.42 | 5.37 | 1.44 | 2.57 | |
Held Since 8.22.2011 | 1367.45 | 10.26 | 1.34 | 0.28 | |
Held Since 8.22.2011 | 176.86 | 5.64 | 2.01 | 1.77 | |
Held Since 8.22.2011 | 831.78 | 8.71 | 8.12 | 0.53 | |
Held Since 8.22.2011 | 219.18 | 12.45 | 2.55 | 0.43 | |
Held Since 8.22.2011 | 1082.15 | N/A | 2.05 | 0.72 | |
Held Since 8.22.2011 | 807.86 | 6.64 | 2.03 | 2.05 | |
Held Since 8.22.2011 | 8944.66 | 7.01 | 1.39 | 1.74 | |
Held Since 8.22.2011 | 1149.14 | 9.98 | 29.56 | 0.63 | |
Held Since 8.22.2011 | 2289.68 | 7.61 | 1.71 | 1.73 | |
Held Since 8.22.2011 | 394.81 | 10.23 | 2.14 | N/A | |
Held Since 8.22.2011 | 740.47 | 13.09 | 1.03 | 1.38 | |
Held Since 8.22.2011 | 741.31 | 11.86 | N/A | 3.63 | |
Held Since 8.22.2011 | 343.01 | 2.99 | 1.46 | 0.83 | |
Held Since 8.22.2011 | 1531.76 | 5.98 | 1.78 | 2.44 | |
Held Since 8.22.2011 | 1498.13 | 12.65 | 1.65 | 1.33 | |
New 8.29.2011 | 15000.09 | 7.88 | 1.76 | 1.04 | |
New 8.29.2011 | 4787.45 | 6.52 | 1.89 | 1.38 | |
New 8.29.2011 | 883.03 | 4.51 | 2.65 | 1.35 | |
New 8.29.2011 | 126.77 | 17.25 | 1.07 | 1.02 | |
New 8.29.2011 | 396.47 | 8.36 | 2.77 | 0.74 | |
New 9.13.2011 | 202.27 | 7.79 | 1.06 | 0.95 | |
New 9.20.2011 | 49.95 | 2.72 | 0.92 | 0.69 | |
Added Back 9.20.2011, Dropped 8.29.2011 | 589.31 | N/A | N/A | 1.47 | |
Added Back 9.28.2011, Dropped 9.20.2011 | 216435.84 | 9.71 | 3.85 | 1.03 | |
New 9.28.2011 | 80.43 | 8.59 | 3.1 | 1.51 | |
Added Back 10.4.2011, Dropped 9.28.2011 | 172.32 | 4.05 | 0.28 | 1 | |
Added Back 10.4.2011, Dropped 9.06.2011 | 159.9 | 7.71 | 12.81 | 0.37 | |
New 10.4.2011 | 2690 | 8.41 | 1.82 | 0.42 | |
New 10.4.2011 | 296.11 | 6.83 | 0.94 | 0.99 | |
MDF | New 10.4.2011 | 196.52 | 7.5 | 2.26 | 0.65 |
Changing component companies has 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
