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, this strategy has performed well, though many analysts who have followed the “Magic Formula” have not seen performance as high as 30.8% annual returns. Greenblatt’s 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 have updated it weekly for an entire quarter (three months ending Nov. 23, 2011). Of the 50 original Magic Portfolio stocks present, only 24 remain one quarter later:
Ticker | Status | Market Cap | 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 | |
NEP | Dropped 8.29.2011 | 63.06 | 1.35 | 0.49 | 2.4 |
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 10.11.2011 | 80.43 | 8.59 | 3.1 | 1.51 | |
Dropped 10.11.2011 | 2690 | 8.41 | 1.82 | 0.42 | |
Dropped 10.19.2011 | 4787.45 | 6.52 | 1.89 | 1.38 | |
Dropped 10.26.2011 | 396.47 | 8.36 | 2.77 | 0.74 | |
Dropped 10.26.2011 | 1153.86 | 8.78 | 1.48 | 1.65 | |
Dropped 11.03.2011 | 202.27 | 7.79 | 1.06 | 0.95 | |
Dropped 11.03.2011 | 49.95 | 2.72 | 0.92 | 0.69 | |
Dropped 11.03.2011 | 296.11 | 6.83 | 0.94 | 0.99 | |
Dropped 11.03.2011 | 227.4 | 17.12 | 2.92 | 1.31 | |
Dropped 11.11.2011 | 1367.45 | 10.26 | 1.34 | 0.28 | |
Dropped 11.11.2011 | 883.03 | 4.51 | 2.65 | 1.35 | |
Dropped 11.11.2011 | 143.96 | 8.54 | 1.48 | 1.85 | |
Dropped 11.11.2011 | 53733.68 | 6.26 | 1.38 | 1.34 | |
Dropped 11.11.2011 | 222.44 | 10.38 | 3 | 1.98 | |
Dropped 11.17.2011 | 1149.14 | 9.98 | 29.56 | 0.63 | |
Dropped 11.17.2011 | 142.82 | 17.21 | 1.45 | 0.45 | |
Dropped 11.17.2011 | 192.86 | 14.83 | 11.33 | 0.65 | |
Dropped 11.17.2011 | 51.47 | 5.5 | 1.7 | N/A | |
Dropped 11.23.2011 | 4565.22 | 10.92 | 3.18 | 0.6 | |
Dropped 11.23.2011 | 322.42 | 5.37 | 1.44 | 2.57 | |
Dropped 11.23.2011 | 1082.15 | N/A | 2.05 | 0.72 | |
Dropped 11.23.2011 | 340.43 | 8.16 | 0.95 | N/A | |
Dropped 11.23.2011 | 1190.22 | 10.89 | 2.86 | N/A | |
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 | 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 | 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 | 1552.6 | 7.98 | 5.98 | 1.32 | |
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 | 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 | 807.86 | 6.64 | 2.03 | 2.05 | |
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 | 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 | 126.77 | 17.25 | 1.07 | 1.02 | |
Added Back 9.28.2011, Dropped 9.20.2011 | 216435.84 | 9.71 | 3.85 | 1.03 | |
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 | |
MDF | New 10.4.2011 | 196.52 | 7.5 | 2.26 | 0.65 |
Added Back 10.11.2011, Dropped 10.4.2011 | 123.25 | 15.49 | 9.44 | 1.05 | |
Added Back 10.26.2011, Dropped 9.28.2011 | 81.59 | 8.53 | 1.99 | 1.43 | |
Added Back 10.26.2011, Dropped 10.4.2011 | 1121.04 | 7.39 | 4.23 | 2.02 | |
New 10.26.2011 | 15460 | 8.04 | 1.47 | 0.68 | |
New 11.03.2011 | 398.93 | 36.44 | 15.59 | 0.23 | |
New 11.03.2011 | 54.9 | 11.38 | 1.9 | 0.49 | |
Added Back 11.10.2011, Dropped 11.03.2011 | 111.48 | 23.68 | 1.36 | 1.36 | |
New 11.11.2011 | 74.51 | 4.47 | 2.2 | 1.09 | |
New 11.11.2011 | 155.93 | 11.22 | 4.32 | 0.32 | |
Added Back 11.17.2011, Dropped 10.19.2011 | 9314.77 | 8.31 | 1.77 | 0.69 | |
Added Back 11.17.2011, Dropped 10.26.2011 | 741.31 | 11.86 | N/A | 3.63 | |
Added Back 11.17.2011, Dropped 11.03.2011 | 2289.68 | 7.61 | 1.71 | 1.73 | |
Added Back 11.17.2011, Dropped 11.11.2011 | 13907.44 | 8.51 | 1.25 | 1.11 | |
New 11.17.2011 | 3035.11 | 8.25 | 1.03 | 0.68 | |
New 11.17.2011 | 81.96 | 3.35 | 0.72 | 2.11 | |
Added Back 11.23.2011, Dropped 10.26.2011 | 589.31 | N/A | N/A | 1.47 | |
Added Back 11.23.2011, Dropped 11.17.2011 | 722.55 | 12.57 | 1.08 | 0.34 | |
Added Back 11.23.2011, Dropped 11.17.2011 | 8944.66 | 7.01 | 1.39 | 1.74 | |
MRX | New 11.23.2011 | 1856.65 | 12.72 | 2.13 | 1.18 |
New 11.23.2011 | 1044.79 | 10.39 | 2.38 | 0.33 |
In addition, 31 stocks that were not in the original Magic Formula portfolio were added to the list for at least one week.
Buying 50 stocks all at once on Aug. 29, 2011, or buying each stock as it entered the list, would have some impact on the portfolio’s overall attributes. The mean price-to-earnings ratio purchased for stocks in the original portfolio was 8.47, and buying all names at when they enter the list would result in a 9.26 average.
The mean price-to-book ratio would have dropped slightly from 3.30 in the 8.29.2011 portfolio to 3.16 for the portfolio assembled over the course of the quarter. The mean beta for all stocks over the quarter was 1.15, which is lower than the 1.34 average beta of the original 8.29.2011 portfolio.
The not-so-exciting conclusion to this study that the list changes gradually, and that many of the names which pop out of Greenblatt’s top 50 stocks end up popping back in. There is no overwhelming reason to pick a few names over time instead of buying 50 all at once based on the dynamics of this list. These are issues of value-averaging and market timing, but are not specific or especially relevant to Greenblatt’s Magic Formula.
Greenblatt’s prescription for trading the portfolio is to trim losers just inside of a one year holding period, and wait longer than one year to sell winners in order to reap a lower tax rate. This timeframe is appropriate for the frequency which firms add and drop from the list. It is likely that this list will consist of mostly different stocks about one year from its inception, and which point investors following this strategy would want to cycle out of old holdings and buy the very best stocks according to Greenblatt’s criteria.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
