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Great ideas are the lifeblood of the investment business and the exclusive focus of The Manual of Ideas. Authored by investment and finance professionals who have grown up on the teachings of Ben Graham, Warren Buffett and Joel Greenblatt, and have studied under or worked with luminaries such as... More
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    Apr 20, 2009 9:11 PM | about stocks: MCGC, TMK, WWWW, AFC, WRLD, WLT, UNM, ELNK, PL, IPHS

    "Magic Formula" investing is based on a simple yet powerful way of searching for undervalued stocks. According to Joel Greenblatt’s The Little Book That Beats The Market, portfolios of stocks selected quantitatively based on MFI criteria have handily outperformed the S&P 500 over the past couple of decades.

    Why We Like Magic Formula Investing

    Advocated by "super investor" Joel Greenblatt. Greenblatt invented MFI as a do-it-yourself version of the approach he has espoused while amassing one of the most impressive investment track records of all time. While reliable data on Greenblatt's complete track record is not available, some estimates put his annualized returns over the past couple of decades at well north of 20%. From 1985-1994, Greenblatt managed the Gotham Partners hedge fund, reporting annualized returns of 50% (after expenses, before performance fees). Gotham returned all outside capital in January 1995.

    Simple. The MFI screen ranks companies based on only two variables: "cheapness" (pre-tax unlevered earnings yield) and "goodness" (return on capital employed). The two rankings are given equal weight in the final compilation of the MFI Top 100. This simple process stands in stark contrast to most quantitative screening methods, which rely on multiple variables and are difficult to replicate.

    Makes sense. Few investors would prefer a bad business to a good one, and few would purposely ignore the price they pay for a stock. MFI seeks out good companies that are available at good prices. The result is a list of businesses that offer both a high earnings yield and a relatively high probability that capital reinvested in the business will generate high returns. It makes intuitive sense that such stocks should outperform.

    Latest "Magic Formula" Stock Screen Results (based on this year's EPS estimates)

    Click here to download the latest screen results, including the key financial metrics used in selecting companies for the "Magic Formula" screen.

    1. MCG Capital / MCGC
    2. Torchmark / TMK
    3. Web.com / WWWW
    4. Allied Capital / ALD
    5. World Acceptance / WRLD
    6. Walter Industries / WLT
    7. Unum Group / UNM
    8. EarthLink / ELNK
    9. Protective Life / PL
    10. Innophos / IPHS
    11. Endo Pharma / ENDP
    12. Phoenix Companies / PNX
    13. Prospect Capital / PSEC
    14. FirstEnergy / FE
    15. Molina Healthcare / MOH
    16. CNA Surety / SUR
    17. Terra Industries / TRA
    18. Southern Union / SUG
    19. Portland General / POR
    20. Pepco Holdings / POM
    21. Humana / HUM
    22. CF Industries / CF
    23. Ness Technologies / NSTC
    24. Entergy / ETR
    25. Cal-Maine Foods / CALM
    26. Joy Global / JOYG
    27. 3Com / COMS
    28. American Oriental / AOB
    29. Energen / EGN
    30. Hercules Technology / HTGC
    31. TECO Energy / TE
    32. Caraco Pharma / CPD
    33. True Religion / TRLG
    34. American Capital / ACAS
    35. NetScout Systems / NTCT
    36. GameStop / GME
    37. UniSource Energy / UNS
    38. Fuqi International / FUQI
    39. A-Power Energy / APWR
    40. Harleysville Group / HGIC
    41. Continucare / CNU
    42. CenterPoint Energy / CNP
    43. Sepracor / SEPR
    44. AgFeed Industries / FEED
    45. China-Biotics / CHBT

    Disclosure: No positions.

    Stocks: MCGC, TMK, WWWW, AFC, WRLD, WLT, UNM, ELNK, PL, IPHS
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