Joel Greenblatt's magic formula, introduced in his 2005 bestseller 'The Little Book That Still Beats the Market,' is a compelling investment strategy for investors like you who are steering their own financial ship.
The concept is simple yet powerful: it's about finding companies that are both
- a bargain and
- excellent at generating profits.
Let's break it down using Quant Investing's approach.
Bargain Prices, Stellar Earnings: The Magic Formula at Work
Take Stellantis N.V. as an example. It stands out in two crucial aspects:
1. Earnings Yield:
Earnings yield is a key metric in identifying companies trading at bargain prices. Unlike the more commonly used price-to-earnings ratio, earnings yield provides a clearer picture by considering pre-tax earnings and incorporating debt levels into the valuation. For Stellantis N.V., its earnings yield is an impressive 26.7%, placing it in the top 100 companies in terms of value.
Why not just use price-to-earnings?
Well, earnings yield digs deeper. It accounts for differing tax levels is it uses operating profits before tax for a more transparent view of a company's profitability. Plus, it uses enterprise value, which takes the company’s whole capital structure, capital, debt and cash, into consideration.
Here are the exact formulas:
Earnings Yield (EBIT to EV) = Operating Income or earnings before interest and taxes (EBIT) / Enterprise Value.
Enterprise Value (EV) = The current market value of the company (market cap or capitalisation)
+ Long-Term Debt + Minority Interest + Preferred capital - Excess Cash.
2. Return on Invested Capital (ROIC):
The second pillar of the magic formula is finding companies that excel in making money, measured by Return on Invested Capital (ROIC).
Stellantis N.V. shines here too. It's a top performer, showcasing the effectiveness of its investments. Its ROIC is high because it generated a high return on its assets.
For every dollar invested, Stellantis NV generates a return of 32.14% - a hallmark of a well-managed company.
Here is the complete formula:
Return on Invested Capital (ROIC) = Trailing 12-month EBIT / ((Current assets – Current liabilities) + Net Fixed Assets)
Discovering More Magic Formula Companies with Quant Investing
While Greenblatt's own screener at magicformulainvesting.com is a quick way to identify these companies, it does come with limitations - it's US-centric, offers limited data, and lacks customization options.
Here's where Quant Investing can help you. Our screener offers you a more flexible tool to find your magic formula companies.
We give you detailed insights, including the magic formula score, earnings yield, ROIC, and much more. And it's not just restricted to the US market; our global scope (all developed markets worldwide) means you have a much wider pool of potential winners to choose from.
Personalising Your Investment Journey
At Quant Investing, we understand that your investment journey is unique. That's why we offer customisable filters to tailor your search.
Whether you want to:
- Focus on specific markets,
- Exclude certain types of stocks, or
- Set a minimum market cap,
We have already saved a stock screen for you so all you have to do is load it.
Investing your own money can be challenging, but with the right tools and strategies, it can also be incredibly rewarding.
By leveraging the magic formula through the Quant Investing screener, you're well on your way to identifying high-potential investment opportunities that align with your goals.
More Magic Formula Articles that may interest you
Here is more information in the magic formula that ma interest you:
Please note: This website is not associated with Joel Greenblatt and MagicFormulaInvesting.com in any way. Neither Mr Greenblatt nor MagicFormulaInvesting.com has endorsed this website's investment advice, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website.