{"id":39956,"date":"2013-07-11T13:09:43","date_gmt":"2013-07-11T17:09:43","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=39956"},"modified":"2013-07-11T13:09:43","modified_gmt":"2013-07-11T17:09:43","slug":"magic-formula-stocks-for-july","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/07\/11\/magic-formula-stocks-for-july\/","title":{"rendered":"Magic Formula Stocks for July"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

It\u2019s hard to take something called a \u201cMagic Formula\u201d seriously.\u00a0 But you should.\u00a0 It\u2019s beaten the market by a wide margin over the past two decades and with less volatility.<\/p>\n

The Magic Formula<\/a><\/strong>\u2014a stock screener designed by hedge fund guru Joel Greenblatt<\/a><\/strong> \u2013ranks stocks by two factors:<\/p>\n

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  1. Profitability (based on Greenblatt\u2019s chosen metric, Return on Capital)<\/li>\n
  2. Earnings yield (the inverse of the P\/E ratio, defined here by Greenblatt as EBIT \/ Enterprise Value)<\/li>\n<\/ol>\n

    Buying good, profitable companies at cheap prices is not exactly a revolutionary idea; this is what Warren Buffett<\/a><\/strong> has successfully done for decades.\u00a0\u00a0 But Greenblatt has created a systematic way to do it, and most of the heavily lifting of number crunching is done by the screener.<\/p>\n

    By Greenblatt\u2019s analysis, the Magic Formula generates annual returns in excess of 30% per year.\u00a0 Independent back tests have generally come up with smaller returns, though the general consensus is that the Magic Formula does indeed beat the market, even after taxes and transactions costs are taken into effect.<\/p>\n

    For the casual investor, Greenblatt recommends buying a portfolio of 20-30 Magic Formula stocks, holding for one year, and then re-running the process annually.\u00a0 That\u2019s one way to do it.\u00a0 But I prefer to use Greenblatt\u2019s screener as a starting point for ideas.\u00a0 I like to see which sectors are overweighted on the screen.\u00a0 And while I am not a big fan of technical analysis and charting, I do take a quick look at a chart to see what the stock price is doing.\u00a0 It\u2019s usually a bad idea to try to catch the proverbial falling knife; all else equal, I like to see a stock in the early stages of a new uptrend.<\/p>\n

    So with all of this said, let\u2019s take a peek at which stocks make the Magic Formula cut as of July.\u00a0 I ran a screen of for the top 30 Magic Formula stocks with market caps over $1 billion, and here are the results:<\/p>\n

    \n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
    Company<\/td>\n\n

    Ticker<\/p>\n<\/td>\n<\/tr>\n

    Abbott Laboratories<\/td>\n\n

    $<\/span>ABT<\/a><\/p>\n<\/td>\n<\/tr>\n

    Activision Blizzard Inc<\/td>\n\n

    $<\/span>ATVI<\/a><\/p>\n<\/td>\n<\/tr>\n

    Apollo Group Inc<\/td>\n\n

    $<\/span>APOL<\/a><\/p>\n<\/td>\n<\/tr>\n

    Apple Inc<\/td>\n\n

    $<\/span>AAPL<\/a><\/p>\n<\/td>\n<\/tr>\n

    Booz Allen Hamilton Holding Corp<\/td>\n\n

    $<\/span>BAH<\/a><\/p>\n<\/td>\n<\/tr>\n

    CACI International Inc.<\/td>\n\n

    $<\/span>CACI<\/a><\/p>\n<\/td>\n<\/tr>\n

    CF Industries Holdings Inc<\/td>\n\n

    $<\/span>CF<\/a><\/p>\n<\/td>\n<\/tr>\n

    Chemed Corp<\/td>\n\n

    $<\/span>CHE<\/a><\/p>\n<\/td>\n<\/tr>\n

    Cirrus Logic Inc.<\/td>\n\n

    $<\/span>CRUS<\/a><\/p>\n<\/td>\n<\/tr>\n

    Cisco Systems Inc<\/td>\n\n

    $<\/span>CSCO<\/a><\/p>\n<\/td>\n<\/tr>\n

    Dell Inc<\/td>\n\n

    $<\/span>DELL<\/a><\/p>\n<\/td>\n<\/tr>\n

    Deluxe Corp<\/td>\n\n

    $<\/span>DLX<\/a><\/p>\n<\/td>\n<\/tr>\n

    Fluor Corp.<\/td>\n\n

    $<\/span>FLR<\/a><\/p>\n<\/td>\n<\/tr>\n

    GameStop Corp.<\/td>\n\n

    $<\/span>GME<\/a><\/p>\n<\/td>\n<\/tr>\n

    Herbalife Ltd<\/td>\n\n

    $<\/span>HLF<\/a><\/p>\n<\/td>\n<\/tr>\n

    InterDigital Inc<\/td>\n\n

    $<\/span>IDCC<\/a><\/p>\n<\/td>\n<\/tr>\n

    Lender Processing Services Inc<\/td>\n\n

    $<\/span>LPS<\/a><\/p>\n<\/td>\n<\/tr>\n

    Lorillard Inc<\/td>\n\n

    $<\/span>LO<\/a><\/p>\n<\/td>\n<\/tr>\n

    Microsoft Corp<\/td>\n\n

    $<\/span>MSFT<\/a><\/p>\n<\/td>\n<\/tr>\n

    Northrop Grumman Corp<\/td>\n\n

    $<\/span>NOC<\/a><\/p>\n<\/td>\n<\/tr>\n

    PDL BioPharma Inc<\/td>\n\n

    $<\/span>PDLI<\/a><\/p>\n<\/td>\n<\/tr>\n

    Pitney Bowes Inc.<\/td>\n\n

    $<\/span>PBI<\/a><\/p>\n<\/td>\n<\/tr>\n

    Questcor Pharmaceuticals Inc.<\/td>\n\n

    $<\/span>QCOR<\/a><\/p>\n<\/td>\n<\/tr>\n

    Raytheon Co.<\/td>\n\n

    $<\/span>RTN<\/a><\/p>\n<\/td>\n<\/tr>\n

    SAIC Inc<\/td>\n\n

    $<\/span>SAI<\/a><\/p>\n<\/td>\n<\/tr>\n

    Seagate Technology Plc<\/td>\n\n

    $<\/span>STX<\/a><\/p>\n<\/td>\n<\/tr>\n

    Unisys Corp<\/td>\n\n

    $<\/span>UIS<\/a><\/p>\n<\/td>\n<\/tr>\n

    United Therapeutics Corp<\/td>\n\n

    $<\/span>UTHR<\/a><\/p>\n<\/td>\n<\/tr>\n

    Valassis Communications Inc.<\/td>\n\n

    $<\/span>VCI<\/a><\/p>\n<\/td>\n<\/tr>\n

    Weight Watchers International Inc.<\/td>\n\n

    $<\/span>WTW<\/a><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

     <\/p>\n

    A few names jump off the list, such as former market darling Apple (<\/span>AAPL<\/a>)<\/span>.<\/b>\u00a0 It\u2019s a strange world \u00a0in which the second-largest company in the world by market cap appears in a value stock screen with a strong bias towards small caps.\u00a0 But Apple is cheap enough\u2014and profitable enough\u2014to make the cut.<\/p>\n

    After spending most of the fourth quarter of last year in free fall, Apple has traded in a range of 400-450 for most of this year.\u00a0 Could the stock have further to fall?\u00a0 Absolutely. But it fits the Magic Formula criteria, and the price seems to have a fairly hard floor just below $400.<\/p>\n

    Apple\u2019s old PC nemesis Microsoft (<\/span>MSFT<\/a>)<\/span><\/b> also made the list, as did Cisco Systems (<\/span>CSCO<\/a>)<\/span><\/b>\u2014both of which I own in my dividend-focused portfolios.<\/p>\n

    Technology companies make up a full third of the screen.\u00a0 In addition to the three I already noted, video game maker Activision Blizzard (<\/span>ATVI<\/a>)<\/span>,<\/b> enterprise IT solutions companies CACI (CACI<\/b>) and Unisys Corporation (<\/span>UIS<\/a>)<\/span><\/b>, semiconductor maker Cirrus Logic (<\/span>CRUS<\/a>)<\/span>,<\/b> computer manufacturer\u00a0 Dell (<\/span>DELL<\/a>)<\/span>,<\/b> cyber security firm SAIC (<\/span>SAI<\/a>)<\/span><\/b> and hard drive manufacturer Seagate Technologies (<\/span>STX<\/a>)<\/span> <\/b>made the screen.<\/p>\n

    Health and nutritionals company Abbott Labs (<\/span>ABT<\/a>)<\/span><\/b>\u2014a Sizemore Capital holding\u2014also made the cut, as did Big Tobacco firm Lorillard (<\/span>LO<\/a>)<\/span> <\/b>and defense giant Northrop Grumman (<\/span>NOC<\/a>)<\/span><\/b>.<\/p>\n

    There are a couple points to note here.\u00a0 First, cheap companies\u2014even those with high returns on capital\u2014can stay cheap for a long time.\u00a0 Microsoft and Lorillard have both been regular fixtures on the Magic Formula screen for several years.\u00a0 (Of course, both have also beaten the S&P by a healthy margin over the past five years, so duration of time on the list is not necesarily a bad thing.)<\/p>\n

    Second, some companies are not really investable at this point, or at least shouldn\u2019t be.\u00a0 I\u2019ll use Dell as an example.\u00a0 Given that Dell is currently in the midst of heated dispute over whether to take the company private, this is probably a company you should avoid.<\/p>\n

    I might also add that you don\u2019t have to use my screen.\u00a0 Greenblatt allows you to set a much lower market cap minimum (as low as $50 million), though you\u2019ll want to be careful when trading in small, illiquid stocks.\u00a0 And you can also expand the list from 30 to 50 stocks to give yourself a larger pool to research.<\/p>\n

    One final note: the math behind the Magic Formula is explained in Greenblatt\u2019s book, <\/i>The Little Book that Beats the Market<\/i><\/a><\/strong>.\u00a0<\/i><\/p>\n

    SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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    Related posts:<\/p>\n