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Joel Greenblatt, the founder of Gotham Asset Management, is a value investor with a focus on special situations. He is known for his "Magic Formula Investing", a quantitative investment strategy of picking stocks that was described in Greenblatt's "The Little Book That Beats the Market". In addition to this "little book", Greenblatt has also published "You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits". He also co-founded the Value Investors Club, which is a website for value investors to share their investment ideas. The club awards $5,000 to the member who submits the best idea once a week. In 2011, a mutual fund using Greenblatt's magic formula called Formula Investing US Value 1000 Fund returned 1.7%, beating average equity hedge funds by around 7 percentage points. The top 10 positions in the latest 13F portfolio of Gotham also returned 20% since the end of September. The calculation assumes that Greenblatt did not increase or reduce his positions.

Here are the top 10 positions and their returns since September 30, 2011:

Company Name

Ticker

Value (*1000)

Return since Sep

SPDR S & P 500 ETF TRUST

(NYSEARCA:SPY)

21488

15.18%

GAMESTOP CORP

(NYSE:GME)

8987

4.68%

DELL INC

(NASDAQ:DELL)

8863

12.73%

TERADYNE INC

(NYSE:TER)

8276

36.88%

CISCO SYSTEMS INC

(NASDAQ:CSCO)

8162

24.43%

K L A TENCOR CORP

(NASDAQ:KLAC)

8099

28.42%

APOLLO GROUP INC

(NASDAQ:APOL)

7987

44.43%

NORTHROP GRUMMAN

(NYSE:NOC)

7734

15.59%

ITT EDUCATIONAL SERV

(NYSE:ESI)

7724

12.43%

APPLIED MATERIALS INC

(NASDAQ:AMAT)

7397

14.67%

Greenblatt is bullish about the market. The largest position in his portfolio is SPDR S&P 500 ETF Trust (SPY). At the end of the third quarter, Gothman invested $21.5 million in SPY, which was up 15.18% since the end of September. Together with Gothman, there are 53 hedge funds with SPY positions at the end of the third quarter. For example, Ray Dalio's Bridgewater Associates, one of the largest hedge funds in the world, had nearly $2 billion invested in SPY.

The best-performing position on the list above is Apollo Group Inc. The stock was up 44.43% so far since the end of the third quarter, beating the market by almost 30 percentage points. Apollo is a company that provides private education services. There are 21 hedge funds with Apollo positions at the end of September. Gotham increased its Apollo stakes by 26% over the third quarter. As of September 30, 2011, the fund had $8 million invested in this stock. Lee Ainslie's Maverick Capital also had $300+ million invested in Apollo. Jim Simons, Cliff Asness, and Ken Griffin are bullish about Apollo as well. Apollo has a market cap of $7.5B and a relatively low P/E ratio of 14.20.

One mega-cap stock that Greenblatt is bullish about is Cisco Systems Inc. At the end of the third quarter, Gotham disclosed to own $8.2 million worth of Cisco shares, up 21% from the end of June. The stock returned 24.43% so far since the end of September, beating the market by 9 percentage points. Cisco is very popular among hedge funds. Fifty-seven hedge funds reported to own Cisco at the end of September. Bill Miller's Legg Mason Capital Management also invested $150+ million in this stock.

Teradyne Inc , KLA Tencor Corp , and Northrop Grumman Corp also outperformed the market since the end of the third quarter. We like Greenblatt. His magic formula investment strategy had back-tested returns of 30.8% per year from 1988 to 2004, versus 12.4% for the S&P 500 index during that period. The strategy also generated decent returns recently. We believe that by focusing on Greenblatt's top stock picks, investors will be more likely to beat the market in the long run.

Disclosure: I am long SPY.

Source: Joel Greenblatt's Top 10 Magic Formula Stocks Have Returned 20% Since September