This month The Manual of Ideas focuses on equity ideas that score highly based on the “magic formula” stock screening methodology, popularized in Joel Greenblatt’s The Little Book That Beats The Market. The “magic formula” looks for companies that are (i) “cheap” on the basis of trailing operating income to enterprise value, and (ii) “good” on the basis of trailing operating income to capital employed in the business. The goal is to pay a low price for companies likely to reinvest capital at high rates of return.
The reason we keep coming back to the “magic formula” as a way of generating investment ideas is simple: It works.
Inside, we are pleased to bring you an exclusive Q&A session with the most well-known advocate of “magic formula” investing, famed investor Joel Greenblatt.
In a slight modification of Greenblatt’s original methodology, which takes into account trailing operating income, we consider companies that rank highly based on one or more of the following inputs: trailing operating income, consensus EPS estimates for the current fiscal year, and consensus EPS estimates for next fiscal year. Since EPS numbers, unlike operating income numbers, do not normalize for the effects of leverage, our forward EPS-based methodology only includes companies with modest or no net financial leverage.
The Manual of Ideas, July 1, 2011 [view excerpt]
— The "Magic Formula" Issue (120 pages)
Editorial Commentary — John Mihaljevic highlights three investment ideas
Superinvestor Update — Tracking the portfolio moves of top investors
Exclusive Q&A with Joel Greenblatt — Insight into the "magic formula"
Selected "Magic Formula" Screens — Identifying potential opportunities
For-Profit Education Stocks — 10 firms scoring high on "magic formula"
Other Investment Candidates — 10 other "magic formula" stocks
Exclusive Interview with Josh Tarasoff — On investing in great businesses
Exclusive Interview with Sahm Adrangi — On Chinese "fraudcaps" etc.
Extra: Fannie/Freddie Preferreds — Ori Eyal on choosing best risk-rewards
Value-oriented Stock Screens — Screen results for bargain-hunting investors
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