What is the magic formula Greenblatt?

The “quality companies on sale” criterion allows investors to invest in some household
names. The Magic Formula (MF) is a quantitative investing method devised by famed value
investor Joel Greenblatt. Greenblatt outlined the Magic Formula in his 2004 book "The
Little Book that Beats the Market."
What is magic formula in stock market?
What is Magic Formula Investing. Magic Formula Investing is a rules-based, money-
making strategy that teaches investors a relatively simple and easy to understand method for
value investing. It relies on quantitative screens of companies and stock, and is designed to
beat the stock market's average annual returns.
Does the magic formula investing work?
Super investor Joel Greenblatt developed the quantitative investing strategy known as the
Magic Formula to screen for value stocks (those with a low EV/EBIT value) that are
considered quality companies (as defined by achieving high returns on capital). ... In the
nutshell, the strategy works as follows: 1.
How much is Joel Greenblatt worth?
Due to his incredible investing success, however, his estimated net worth is about $87.5
billion, making him the third richest person on earth. Investment track record: From 1965 to
2017, shares in Berkshire Hathaway had annual returns of 20.9% compared to the S&P 500
index's 9.9% return.
How do you calculate earnings yield?
If its current annual EPS is $3 and the stock is trading for $111 per share, the P/E is $111
divided by $3, or 37. To calculate Fryyndar and Ulf's earnings yield, just reverse the P/E
ratio, dividing the annual EPS by the current stock price. $3 divided by $111 equals 0.027, or
2.7%.
How do you calculate PE ratio without EPS?
The P/E ratio is calculated by dividing a company's current stock price by its earnings per
share (EPS). If you don't know the EPS, you can calculate it by subtracting a company's
preferred dividends paid from its net income, and then dividing the result by the number of
shares outstanding.
How do I calculate return on capital?
Part 1 Calculating Return on Capital
1. Gather the company's financial statements. ...
2. Get the net income for the year from the income statement. ...
3. Subtract any dividends the company may have issued. ...
4. Determine the total capital at the beginning of the year. ...
5. Subtract dividends from net income, and divide by the total capital.
What do PE ratio and EPS indicate?
Introduction to PE ratio: PE ratio is one of the most widely used tools for stock selection. It
is calculated by dividing the current market price of the stock by its earning per share (EPS).
It shows the sum of money you are ready to pay for each rupee worth of the earnings of the
company.
What does PE ratio tell you?
Generally a high P/E ratio means that investors are anticipating higher growth in the future.
The average market P/E ratio is 20-25 times earnings. The P/E ratio can use estimated
earnings to get the forward looking P/E ratio. Companies that are losing money do not have
a P/E ratio.
What is a good eps?
EPS ratio. ... A company with a high earnings per share ratio is capable of generating a
significant dividend for investors, or it may plow the funds back into its business for more
growth; in either case, a high ratio indicates a potentially worthwhile investment, depending
on the market price of the stock.
What is a good market cap?
Market cap—or market capitalization—refers to the total value of all a company's shares
of stock. It is calculated by multiplying the price of a stock by its total number of outstanding
shares. For example, a company with 20 million shares selling at $50 a share would have a
market cap of $1 billion.
Does value investing beat the market?
Having the companies that have the best value in the will over a period beat the broader
market and after 2-3 cycles, the returns from value investing will naturally be above 3 times
the average market growth. ... Graham's method is buying undervalued stocks, which means
finding the intrinsic value of that security.
How do you calculate PE?
Steps
1.Know the formula. The formula for calculating the price-earnings ratio for any stock is
simple: the market value per share divided by the earnings per share (EPS). ...
2.Find the market price. ...
3.Calculate or find the Earnings per share. ...
4.Calculate the price/earnings ratio.
What is a good P E ratio for a company?
Generally a high P/E ratio means that investors are anticipating higher growth in the future.
The average market P/E ratio is 20-25 times earnings. The P/E ratio can use estimated
earnings to get the forward looking P/E ratio. Companies that are losing money do not have a
P/E ratio.
How is ROIC calculated?
The Return on Invested Capital Calculation. To calculate a company's ROIC, divide the
company's net operating profit on an after-tax basis by its operating capital. ... To calculate
the numerator, Net Operating Profit after Taxes (NOPAT), start with the income statement.
How do I calculate ROCE?
Return on capital employed formula is calculated by dividing net operating profit or EBIT
by the employed capital. If employed capital is not given in a problem or in the financial
statement notes, you can calculate it by subtracting current liabilities from total assets.
How To Calculate Net Working Capital in 3 Easy Steps | Behalf
Step 1: Calculate Current Assets. Current assets are the property your business presently
owns that will be converted to cash within a year (i.e. inventory, accounts receivable, cash on
hand and short-term accounts). ...
Step 2: Calculate Current Liabilities. ...
Step 3: Subtract.
Is a high PE ratio good?
Generally speaking, a high P/E ratio indicates that investors expect higher earnings.
However, a stock with a high P/E ratio is not necessarily a better investment than one with a
lower P/E ratio, as a high P/E ratio can indicate that the stock is being overvalued.
What does PE ratio of 0 mean?
Yes, a stock can have a negative price-to-earnings ratio (P/E). The P/E ratio provides the
market value of a stock compared to the company's earnings. ... A negative P/E ratio means
the company has negative earnings or is losing money.
Is it better to have a higher or lower PE ratio?
Generally speaking, a high P/E ratio indicates that investors expect higher earnings.
However, a stock with a high P/E ratio is not necessarily a better investment than one with a
lower P/E ratio, as a high P/E ratio can indicate that the stock is being overvalued.
 What is PE value of a share?
The P/E ratio is calculated by dividing the market value price per share by the company's
earnings per share. Earnings per share is the amount of a company's profit allocated to each
outstanding share of a company's common stock, serving as an indicator of the company's
financial health.
How do you calculate PE ratio from annual report?
Calculate or find the Earnings per share. Financial analysts generally use what is called a
trailing P/E ratio. In this case, EPS is calculated by taking a company's net income over the
last four quarters (twelve months), account for any stock splits, and then dividing by the
number of shares outstanding.
Why PE ratio is important?
The price-to-earnings ratio helps investors determine the market value of a stock compared
to the company's earnings. ... The P/E ratio is important because it provides a measuring
stick for comparing whether a stock is overvalued or undervalued.
What is EPS & PE ratio?
The price/earnings (P/E) ratio, also known as an “earnings multiple,” is one of the most
popular valuation measures used by investors and analysts. The basic definition of a P/E
ratio is stock price divided by earnings per share (EPS). ... This is where earnings yield
comes in.
What is EPS in stock market with example?
Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding
share of common stock. Earnings per share serves as an indicator of a company's
profitability.
What is a good beta?
A beta of less than 1 means that the security will be less volatile than the market. A beta of
greater than 1 indicates that the security's price will be more volatile than the market. For
example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
What is good earnings yield?
The earnings yield refers to the earnings per share for the most recent 12-month period
divided by the current market price per share. The earnings yield (which is the inverse of the
P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the
company.
What should PE ratio?
Things to Remember. Generally a high P/E ratio means that investors are anticipating higher
growth in the future. The average market P/E ratio is 20-25 times earnings. The P/E ratio
can use estimated earnings to get the forward looking P/E ratio.
What is a good EPS TTM?
EPS - Earning Per Share. TTM - Trailing Twelve Months. Earning per share is calculated by
dividing total earning of a company by total number of outstanding equity shares. Earning per
share is calculated for a particular time period ranging from a quarter (three months) to a year
(twelve months).
How do we calculate EPS?
First, subtract the preferred dividends paid from the net income. This will tell you the total
earnings available to common shareholders. Next, divide the earnings total you just
calculated by the number of outstanding shares listed on the balance sheet. This will give
you the EPS.
What does Marketcap mean?
Market cap, also known as market capitalization is the total market value of all of a
company's outstanding shares. It is also incorrectly known to some as what the company is
really worth, or in other words the value of the business.
 How do you evaluate market cap?
How can I use market capitalization to evaluate a stock? Market capitalization refers to
the total dollar market value of a company's outstanding shares. Colloquially called "market
cap," it is calculated by multiplying the total number of a company's shares by the current
market price of one share.
What does the market cap indicate?
Market cap—or market capitalization—refers to the total value of all a company's shares
of stock. It is calculated by multiplying the price of a stock by its total number of outstanding
shares. ... Mid-cap companies are typically businesses with a market value between $2
billion and $10 billion.
Is value investing a good idea?
Over time, value is roughly the way the market prices stocks, but over the short term, which
sometimes can be as long as two or three years, there are periods when it doesn't work. And
that is a very good thing. ... It is very difficult to follow a value approach unless you have
sufficient confidence in it.
What is value investing strategy?
Value investing is an investment strategy where stocks are selected that trade for less than
their intrinsic values. Value investors actively seek stocks they believe the market has
undervalued.
What is value investing and how is it different to growth investing?
Growth vs. value: two approaches to stock investing. Growth and value are two
fundamental approaches, or styles, in stock and stock mutual fund investing. Growth
investors seek companies that offer strong earnings growth while value investors seek
stocks that appear to be undervalued by the marketplace.
How do you calculate market book value?
We first subtract the total liabilities from the total assets and divide the difference by the total
number of shares outstanding on that date. Many investors rephrase this equation to form the
book to market ratio formula by dividing the total book value of the firm by the total
market value of the company.
What is the formula of PE ratio?
The price earnings ratio formula is calculated by dividing the market value price per share
by the earnings per share. This ratio can be calculated at the end of each quarter when
quarterly financial statements are issued. It is most often calculated at the end of each year
with the annual financial statements.
What is the formula for calculating potential energy?
The formula for potential energy depends on the force acting on the two objects. For the
gravitational force the formula is P.E. = mgh, where m is the mass in kilograms, g is the
acceleration due to gravity (9.8 m / s2 at the surface of the earth) and h is the height in
meters.
How do you calculate earnings yield?
If its current annual EPS is $3 and the stock is trading for $111 per share, the P/E is $111
divided by $3, or 37. To calculate Fryyndar and Ulf's earnings yield, just reverse the P/E
ratio, dividing the annual EPS by the current stock price. $3 divided by $111 equals 0.027, or
2.7%.
What do PE ratio and EPS indicate?
Introduction to PE ratio: PE ratio is one of the most widely used tools for stock selection. It
is calculated by dividing the current market price of the stock by its earning per share (EPS).
It shows the sum of money you are ready to pay for each rupee worth of the earnings of the
company.
 How do you evaluate the PE ratio?
Simply put, the p/e ratio is the price an investor is paying for $1 of a company's earnings or
profit. In other words, if a company is reporting basic or diluted earnings per share of $2 and
the stock is selling for $20 per share, the p/e ratio is 10 ($20 per share divided by $2 earnings
per share = 10 p/e).
What does PE ratio indicate?
The price to earnings ratio indicates the expected price of a share based on its earnings. As a
company's earnings per share being to rise, so does their market value per share. A company
with a high P/E ratio usually indicated positive future performance and investors are willing
to pay more for this company's shares.
How do you calculate PE ratio without EPS?
The P/E ratio is calculated by dividing a company's current stock price by its earnings per
share (EPS). If you don't know the EPS, you can calculate it by subtracting a company's
preferred dividends paid from its net income, and then dividing the result by the number of
shares outstanding.
How do you calculate share price?
To calculate the current intrinsic value of a stock, find the company's average historical P/E
ratio and multiply by the projected earnings per share. Let's say the historical P/E ratio for
Flying Pigs Corporation has been 18. The current P/E ratio is $67 divided by $4.19 equals 16
times.
How do you find the market value in an annual report?
To calculate this market value, multiply the current market price of a company's stock by
the total number of shares outstanding. The number of shares outstanding is listed in the
equity section of a company's balance sheet
How do you calculate share profit?
Multiply the sale price per share by the number of shares sold to find your total proceeds
from the sale. Subtract the cost basis from the total proceeds to calculate your stock profit.
Note that if the cost basis is greater than the total proceeds from selling the stock, your
answer will be a negative number.
Why is P E ratio important?
The price-to-earnings ratio helps investors determine the market value of a stock compared
to the company's earnings. ... The P/E ratio is important because it provides a measuring
stick for comparing whether a stock is overvalued or undervalued.25 May 2018
Is low PE ratio good?
Generally speaking, a high P/E ratio indicates that investors expect higher earnings. ... On
the flip side, when a company's stock has a low P/E ratio, it may indicate that the stock is
undervalued. Investors can often buy undervalued stock at a discount and then profit when
the price of that stock climbs.
Here's more on how to choose a stock:
1. Buy what you know. Start with an industry or a company that's familiar to you. ...
2. Consider price and valuation. ...
3. Evaluate financial health. ...
4. What not to do when buying a stock:
5. For more to read: Nasdaq offers a 12-step process for evaluating stocks.
Is a high P E ratio good?
Generally speaking, a high P/E ratio indicates that investors expect higher earnings.
However, a stock with a high P/E ratio is not necessarily a better investment than one with a
lower P/E ratio, as a high P/E ratio can indicate that the stock is being overvalued.
How do you calculate PE?
Steps
1. Know the formula. The formula for calculating the price-earnings ratio for any stock
is simple: the market value per share divided by the earnings per share (EPS). ...
2. Find the market price. ...
3. Calculate or find the Earnings per share. ...
4. Calculate the price/earnings ratio.
What is a good price to earnings ratio for stocks?
Simply put, the p/e ratio is the price an investor is paying for $1 of a company's earnings or
profit. In other words, if a company is reporting basic or diluted earnings per share of $2 and
the stock is selling for $20 per share, the p/e ratio is 10 ($20 per share divided by $2
earnings per share = 10 p/e).
What is the formula to calculate ROI?
To calculate ROI, the benefit (or return) of an investment is divided by the cost of the
investment. The result is expressed as a percentage or a ratio. In the above formula, "Gain
from Investment” refers to the proceeds obtained from the sale of the investment of interest.
Is ROIC the same as ROA?
ROIC stands for Return on Invested Capital. ROA stands for Return on Assets. ROA tells
us how efficiently a business uses its existing assets to generate profits. ROIC tells us how
effective a business is in re-investing in itself.
Is ROIC the same as ROCE?
ROCE = EBIT / (shareholders funds + debt) To be consistent with numerator and
denominator, the return should be taken prior to interest (the return to lenders) and tax (EBIT)
2) ROIC - Return on Invested Capital - Though ROIC is very similar to ROCE, its a more
purist measure of the business return.
How do I calculate ROCE?
Return on capital employed formula is calculated by dividing net operating profit or EBIT
by the employed capital. If employed capital is not given in a problem or in the financial
statement notes, you can calculate it by subtracting current liabilities from total assets.
How do you calculate Roace?
2. Deduct the value of liabilities from the value of total assets to obtain capital employed at
the begging of the period plus at the end of the period and divide it by 2. 3. Divide the EBIT
by the result obtained as capital employed to obtain the ROACE.
How do you calculate EBIT?
Find the operating profit (EBIT) on the income statement. This is the company's revenue
minus its expenses (without taking taxes and interest into account). The expenses include
amortization and depreciation. To calculate EBIT manually, subtract your expenses (besides
interest and taxes) from your sales revenue.
How To Calculate Net Working Capital in 3 Easy Steps | Behalf
1. Step 1: Calculate Current Assets. Current assets are the property your business
presently owns that will be converted to cash within a year (i.e. inventory, accounts
receivable, cash on hand and short-term accounts). ...
2. Step 2: Calculate Current Liabilities. ...
3. Step 3: Subtract.
How do you calculate ROIC?
The Return on Invested Capital Calculation. To calculate a company's ROIC, divide the
company's net operating profit on an after-tax basis by its operating capital. However, you
won't find the numerator and denominator of this equation on a company's financial
statements. You'll need to calculate them first.
 Is a high beta a good sign?
If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are
supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less
risk but also lower returns. ... All things being equal, the higher a company's beta is, the
higher its cost of capital discount rate.27 Dec 2017

What is NWC formula?

The formula for net working capital (NWC), sometimes referred to as simply working
capital, is used to determine the availability of a company's liquid assets by subtracting its
current liabilities. ... Current Liabilities are the liabilities that are due within 12 months.
Do you want a high or low PE ratio?
Generally speaking, a high P/E ratio indicates that investors expect higher earnings.
However, a stock with a high P/E ratio is not necessarily a better investment than one with a
lower P/E ratio, as a high P/E ratio can indicate that the stock is being overvalued.
What is a good market cap?
Market cap—or market capitalization—refers to the total value of all a company's shares
of stock. It is calculated by multiplying the price of a stock by its total number of outstanding
shares. For example, a company with 20 million shares selling at $50 a share would have a
market cap of $1 billion.
What is a good beta?
A beta of less than 1 means that the security will be less volatile than the market. A beta of
greater than 1 indicates that the security's price will be more volatile than the market. For
example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
How do I calculate free cash flow?
Free cash flow can be calculated in various ways, depending on audience and available data.
A common measure is to take the earnings before interest and taxes multiplied by (1 − tax
rate), add depreciation and amortization, and then subtract changes in working capital and
capital expenditure.
How do you calculate EPS from EBIT?
To calculate the level of EBIT where EPS remains stable, simply input the debt interest,
current EPS and updated shares outstanding values and solve for EBIT: ($10.50 x 20,000) +
0 ÷ (1 - 0.3) + $500 = $300,500. Under this financing plan, the company must more than
double its earnings to maintain a stable EPS.
What is the formula for EPS?
First, subtract the preferred dividends paid from the net income. This will tell you the total
earnings available to common shareholders. Next, divide the earnings total you just
calculated by the number of outstanding shares listed on the balance sheet. This will give
you the EPS.
What is good P E ratio?
Generally a high P/E ratio means that investors are anticipating higher growth in the future.
The average market P/E ratio is 20-25 times earnings. The P/E ratio can use estimated
earnings to get the forward looking P/E ratio. Companies that are losing money do not have
a P/E ratio.
How do you calculate market book value?
We first subtract the total liabilities from the total assets and divide the difference by the total
number of shares outstanding on that date. Many investors rephrase this equation to form the
book to market ratio formula by dividing the total book value of the firm by the total
market value of the company.

What is a good EPS for a company?

 A company with a high earnings per share ratio is capable of generating a significant
dividend for investors, or it may plow the funds back into its business for more growth; in
either case, a high ratio indicates a potentially worthwhile investment, depending on the
market price of the stock.
What is CE in stock market?
In Call (CE) Option, If you buy CE than You have right you buy a stock at a fixed price
( Called Strike Price) on fixed date but not obligation. If you buy Put (PE) Option than you
have write to sell a stock at a fixed price ( Called Strike Price) but not obligation.
What is PE ratio formula?
PE ratio: How it helps buy great stocks. ... It is calculated by dividing the current market
price of the stock by its earning per share (EPS). It shows the sum of money you are ready to
pay for each rupee worth of the earnings of the company
What does PE ratio of 0 mean?
Yes, a stock can have a negative price-to-earnings ratio (P/E). The P/E ratio provides the
market value of a stock compared to the company's earnings. ... A negative P/E ratio means
the company has negative earnings or is losing money.19 Jul 2018
Should EPS be high or low?
A company with a high earnings per share ratio is capable of generating a significant
dividend for investors, or it may plow the funds back into its business for more growth; in
either case, a high ratio indicates a potentially worthwhile investment, depending on the
market price of the stock.
How is beta calculated?
What Is the Formula for Calculating Beta? Beta is a measure used in fundamental analysis
to determine the volatility of an asset or portfolio in relation to the overall market. The overall
market has a beta of 1.0, and individual stocks are ranked according to how much they
deviate from the market.1
How is beta calculated in CAPM?
Summary of steps in the calculation
1. Locate suitable proxy companies.
2. Determine the equity betas of the proxy companies, their gearings and tax rates.
3. Ungear the proxy equity betas to obtain asset betas.
4. Calculate an average asset beta.
5. Regear the asset beta.
6. Use the CAPM to calculate a project-specific cost of equity.

New Magic Formula Picks

Investing is often made to seem complicated. It doesn’t have to be. The screen I’m running
this week exemplifies how a very uncomplicated but intelligent approach to investing can
prove extremely effective. The screen is based on the 'Magic Formula' developed by hedge
fund star Joel Greenblatt and it has produced excellent returns in the seven years I’ve run it,
with the top 10 stocks boasting a cumulative total return of 254 per cent compared with 68
per cent from the FTSE All-Share over the same period.
It is easy for would-be investors to be put off the stock market by the reams of jargon the
investment industry invents to package even the simplest of ideas – a cynic may wonder if the
chief reason for the deluge of investo-waffle is to confuse and intimidate clients that may
otherwise be asking why their fees are so high. Meanwhile, an intricate knowledge of
company accounts and searing analytical skill may help prevent some bad investment
mistakes, but basic portfolio diversification can also be a very effective guard against the
danger of individual stocks blowing up. And while charting tools and market-timing
strategies may be invaluable for some day traders, for those with longer-term time horizons,
these techniques can simply prove a complex nuisance. But with so many investment
approaches competing for attention, it is all too easy to lose sight of the wood for the trees.
However, boil everything down, and aside from luck, there are essentially two basic
determinates of stock market success: the quality of stocks bought (higher the better) and
prices paid (lower the better). Mr Greenblatt outlined a screening method as simple and
succinct as this basic concept in his 2005 best-seller The Little Book That Beats The Market.
Indeed, when Mr Greenblatt wrote the highly-readable book, the reader he had in mind was a
disinterested investor who wanted to generate strong returns but didn’t want to spend time
pawing through company accounts and watching the market.
The screen itself was designed to produce outperformance over the long term, but in any
single year it is liable to underperform. That means the advice to anyone following the Magic
Formula system is to stick with it come good times or bad, in fact, especially come bad. Over
the seven years I’ve monitored a screen based on the Magic Formula approach, this advice
has certainly been valuable. Indeed, following two years of relatively weak performance up
to February 2016, the screen has taken off again in the last 24 months. The table below shows
how the screen has performed in each of the seven years I’ve run it. Mr Greenblatt suggested
his formula should be used to construct a portfolio of 20 to 30 stocks, but I’ve also monitored
the performance of more concentrated portfolios of 10 and 15 stocks, which have produced
stronger returns to date but have also been more erratic.
 Year-by-year performance table
FTSE All Share Greenblatt top 10 Greenblatt top 15 Greenblatt top 20 Greenblatt top 30
2011 3% 24% 22% 14% 13%
2012 12% 39% 32% 33% 24%
2013 9% 28% 39% 29% 28%
2014 10% -6% -8% 6% 1%
2015 -10% -7% -11% -12% -11%
2016 29% 47% 41% 47% 46%
2017 5% 24% 15% 7% 5%
Source: Thomson Datastream
Over the last 12 months it has been the screen’s top picks that have really delivered. But
while very big gains by some of the top 10 stocks powered the overall performance, there
were also some truly grizzly returns from lower ranking stocks. Fortunately, though, the
diversity of the 20 and 30 stock portfolios helped limit the impact of the really bad
performing picks. It is worth noting that several of last year’s big disappointments crop up
again on this year’s list of Greenblatt stocks, such as troubled outsourcer Capita (CPI) and
struggling newspaper group Trinity Mirror (TNI).
2017 performance
Name TIDM Total return (20 Feb 2017 - 19 Feb 2018) Greenblatt rank
Wizz Air WIZZ 94% 1
Gama Aviation GMAA 29% 2
Dart DTG 26% 3
RM RM. 6.0% 4
XLMedia XLM 89% 5
DFS Furniture DFS -22% 6
Dixons Carphone DC. -29% 7
Hays HAS 34% 8
Trinity Mirror TNI -30% 9
Next NXT 39% 10
Somero Enterprises SOM 49% 11
Empresaria EMR -24% 12
Capita CPI -61% 13
Foxtons FOXT -18% 14
SCS SCS 48% 15
Character CCT -12% 16
STV STVG -3.3% 17
Savills SVS 22% 18
Impellam IPEL -20% 19
Utilitywise UTW -78% 20
Staffline STAF -11% 21
Air Partner AIR 29% 22
Berkeley BKG 38% 23
Mitie MTO -24% 24
ITV ITV -10% 25
Pets At Home PETS -3.7% 26
Card Factory CARD -14% 27
Gem Diamonds GEMD -28% 28
Centaur Media CAU 3.2% 29
St Ives SIV 29% 30
Greenblatt top 10 - 24% -
Greenblatt top 15 - 15% -
Greenblatt top 20 - 6.9% -
Greenblatt top 30 - 4.9% -
FTSE All Share - 4.8% -
FTSE 350 - 4.6% -
FTSE All Small - 11% -
FTSE Aim All Share - 16% -
Source: Thomson Datastream
As the time over which I have monitored this screen gets longer, the significance of the
cumulative nature of returns (building this year’s performance on last year’s) becomes more
pronounced. This also means the importance of considering the cumulative burden of costs
also becomes more important. The table below shows how a notional 1.5 per cent annual cost
for reshuffling portfolios would have affected returns. The impact of charges is becoming
quite pronounced with the total return from the most concentrated portfolio of 10 shares
dropping from 254 per cent to 218 per cent once charges are included. As well as the table
showing returns with and without charges, the bar-graph attempts to illustrate their
significance. Charges are not factored into the total return graph, though.
IMPACT OF NOTIONAL 1.5 PER CENT CHARGE
FTSE Index Mix (FTSE
7yr to Feb Greenblatt Greenblatt Greenblatt Greenblatt
All- 350/All
2018 top 10 top 15 top 20 top 30
Share Small/Aim)
Total return 254% 195% 187% 146% 68% 67%
Total return
with 1.5%
218% 166% 158% 121% - -
1.5% pa
charge
The Magic Formula screen works by looking at a slightly modified form of a price-to-
earnings ratio to assess 'value' (the price paid) and a modified version of a return on capital
ratio to assess 'quality'. Details can be found below. All stocks are then ranked for value and
separately ranked for quality. The two rankings are then added together and a final ranking is
produced. The screen is carried out on all non-financial, main-market and Aim stocks with
market capitalisations of more than £50m. Financial companies are excluded from the screen
because the nature of their balance sheets means the quality measure used can give dubious
results.
Value
Mr Greenblatt uses the earnings ratio in his magic formula (this is simply like a PE ratio with
the numerator and denominator flipped on their heads) calculated using enterprise value (EV)
and earnings before interest and tax (Ebit). EV adjusts a company’s market capitalisation for
cash and debts (debts can include pension deficits and long-term lease liabilities in some
versions of EV, but not the one used by this screen).
Quality
To measure quality, Mr Greenblatt looks at Ebit generated from 'tangible assets'. Tangible
assets consist of net working capital added to net fixed assets, which reflects assets that are
actually being used in a company's operations to generate profits.
By simplifying the investment process to the degree the Magic Formula does, a lot of the
nuances factored into a typical investment decision are eschewed. While this certainly saves
time and effort, and can result in bold and profitable investments, it comes with risks. Anyone
familiar with the stocks that make up the top 10 Greenblatt picks this year will probably be
able to see those risk writ large. Indeed, the low valuations many of the stocks boast reflects
chronic concerns about their businesses. What’s more, major issues with several of these
companies may mean the purported quality of their operations is set to deteriorate. This, for
example, is likely to be the case with companies such as Capita and Interserve (IRV), which
have been forced to write down the value of their assets in response to poor trading. What’s
more, Capita has been forced into a rescue writes issue. That said, for investors willing to
hold their nose and dive in, there is a strong contrarian angle to many of these situations and
the track record of this screen certainly provides grounds for encouragement even if it means
kissing a few frogs along the way.
2018 Greenblatt picks
 Fwd
Market 3-month Greenblatt
Name TIDM Price NTM DY
cap momentum rank
PE
Trinity Mirror LSE:TNI £208m 77p 2.2 7.1% 1.2% 1
Safestyle AIM:SFE £129m 156p 10.8 7.2% -20.6% 2
Ferrexpo LSE:FXPO £1,734m 296p 6.9 1.6% 21.0% 3
Harvey Nash AIM:HVN £64m 88p 8.2 4.6% -10.3% 4
Dixons Carphone LSE:DC. £2,317m 200p 8.0 5.6% 30.7% 5
DP Eurasia LSE:DPEU £315m 217p 36.2 - 6.9% 6
Interserve LSE:IRV £104m 72p 2.4 11.3% -10.0% 7
Go-Ahead LSE:GOG £592m 1,376p 7.8 7.4% -15.6% 8
DFS Furniture LSE:DFS £397m 188p 10.6 6.0% -1.7% 9
Capita LSE:CPI £1,268m 191p 4.9 16.6% -60.9% 10
Wizz Air LSE:WIZZ £2,353m 3,237p 14.2 - 1.2% 11
Morgan Sindall LSE:MGNS £540m 1,228p 10.4 2.9% -13.7% 12
GlaxoSmithKline LSE:GSK £64,547m 1,319p 12.4 6.1% 1.0% 13
ScS LSE:SCS £90m 225p 9.8 6.5% 29.5% 14
Berkeley LSE:BKG £5,121m 3,800p 8.7 3.6% 0.4% 15
The Character
AIM:CCT £96m 458p 12.3 4.4% 8.0% 16
Group
Marshall Motor AIM:MMH £117m 151p 5.9 3.6% -5.6% 17
Card Factory LSE:CARD £686m 201p 10.7 12.1% -27.9% 18
Epwin AIM:EPWN £125m 88p 7.3 7.5% 16.6% 19
Gama Aviation AIM:GMAA £114m 259p 11.1 1.0% 1.2% 20
Lookers LSE:LOOK £357m 90p 6.2 4.0% -7.7% 21
QinetiQ LSE:QQ. £1,130m 202p 11.9 3.0% -3.8% 22
Savills LSE:SVS £1,349m 990p 14.2 3.0% 3.7% 23
CPP AIM:CPP £105m 12p 0.0 - -9.7% 24
Games Workshop LSE:GAW £738m 2,280p 14.7 4.4% 1.5% 25
International
Consolidated LSE:IAG £12,452m 608p 6.4 3.6% 2.2% 26
Airlines
PayPoint LSE:PAY £569m 834p 13.5 9.8% -5.9% 27
888 LSE:888 £989m 275p 20.1 2.4% 10.8% 28
Staffline AIM:STAF £256m 959p 8.3 2.8% -6.0% 29
Luceco LSE:LUCE £132m 82p 10.0 1.0% -65.0% 29
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