Stocks

Magic Formula Stocks by Relative Strength

Joel Greenblatt's Magic Formula Investing (MFI) strategy, detailed in his book The Little Book That Beats the Market, has a solid and proven track record. The book itself reports a 30.8% annual average return from 1988 to 2004, against the S&P 500's 12.4% annual return. More recently, Greenblatt's MFI mutual fund service, Formula Investing, has updated performance results that shows the strategy outperforming the S&P 500 by over 200% during the 10 year period ranging from the end of June 1999 to the end of June 2009 - a much more difficult period for the market than the original study.

The MFI strategy continues to deliver winners in more recent time periods as well. Consider the period from one year ago to today, a typical holding period in MFI. These are the returns you could have had from buying into a Magic Formula position and holding for the recommended one year period (these results compiled with the MFI Historical Performance Tool using 2 screens, the top 100 over 50 million and top 50 over 2 billion):

Best 10 Magic Formula Performers from 1 Year Ago

TickerCompany1yr AgoCurrent Change
ZINCHorsehead Holding4.5211.38151.77%
PCUSouthern Copper12.731.85150.79%
DEPODepoMed2.615.79121.84%
LCAVLCA Vision2.776.14121.66%
MLNXMellanox Technologies8.0517.6118.63%
WDCWestern Digital16.8236.22115.34%
SPSSSPSS25.6849.9994.67%
NVDANvidia7.2413.991.99%
TRATerra Industries18.7534.4483.68%
AHCIAllied Healthcare1.653.0283.03%

Considering the S&P 500 is only up about 7% from a year ago, there are some impressive returns on there. Of course, no strategy is without its laggards, and MFI has these as well:

Worst 10 Magic Formula Performers from 1 Year Ago

TickerCompany1yr AgoCurrent Change
IARIdearc0.740.02-97.30%
PACRPacer International12.633.66-71.02%
KYCNKeystone Consolidated Industries8.754.2-52.00%
CHCGChina 3C Group1.10.57-48.18%
KHDKHD Humboldt Wedag17.5110.23-41.58%
TSCMTheStreet.com4.562.95-35.31%
ABCAmerisourceBergen33.4422.41-32.98%
HURCHurco Companies21.7316.48-24.16%
CITPCOMSYS IT Partners8.056.18-23.23%
WFRMEMC Electronic Materials20.6915.96-22.86%

But all in all, MFI has done very well over the past year. If you would have chosen from the Top 100 over 50 million screen early last October, on average your MFI picks would have appreciated 25% a pop, outperforming the S&P by 19%, with a 67% chance of each pick earning positive returns. If you played it more conservative and stuck to the large cap, Top 50 over 2 billion screen, you would have done even better, with an average position gain of 30% (24% better than the market), and a staggering 84% chance of earning positive returns. Clearly, MFI has been a great strategy over the past year, and historical back-testing shows it to be a winner long-term, as well.

So which are the most attractive MFI stocks for this upcoming year? Well, there are many ways to try and filter them down farther. One is to do some old-fashioned fundamental and empirical research on them. Additionally, we could add some additional mechanical metrics that have been shown to find outperforming stocks in the past. A great source for this is the "Bible of Back-testing", James O'Shaughnessy's What Works on Wall Street (book review here). One conclusion from his studies was that adding 12-month relative strength to value based screens like MFI greatly improved results one year later. He defined relative strength simply as the trailing 12-month return for that stock, indicating strong price momentum. The Wall Street axiom "winners keep winning" seems to have validity, according to O'Shaughnessy.

Using that knowledge, let's have a look at the top 10 current Magic Formula stocks with the best trailing 12-month performance (the three screens used are the top 50 over 50 million, top 50 over 1 billion, and top 30 over 3 billion).

Current MFI Stocks with Strongest Trailing 12-month Performance

TickerCompany1yr AgoCurrentChange
ONTYOncothyreon Inc0.874.88460.92%
VMVirgin Mobile USA Inc1.294.84275.19%
INTWorld Fuel Services Corp19.1849.3157.04%
MYLMylan Inc8.5216.6995.89%
NAVRNavarre Corp1.142.1588.60%
TRATerra Industries Inc.18.7534.4483.68%
SHAWShaw Group Inc. (The)18.0231.0572.31%
GNIGreat Northern Iron Ore Properties5591.6266.58%
BRBroadridge Financial Solutions Inc12.720.2859.69%
SEPRSepracor Inc.14.5722.9457.45%

These could make interesting choices considering the historical record. However, it reasons to stand that stocks that have not done well over the past year may be oversold. The following lists the current MFI stocks with the worst trailing 12-month results. Are they oversold? Or is there justifiable reasons for their price decline? Doing your MagicDiligence could help answer those questions!

Current MFI Stocks with Weakest Trailing 12-month Performance

TickerCompany1yr AgoCurrentChange
MTXXMatrixx Initiatives Inc16.475.61-65.94%
JTXJackson Hewitt Tax Service Inc13.94.82-65.32%
KHDKHD Humboldt Wedag International Ltd17.5110.23-41.58%
PTIEPain Therapeutics Inc8.795.38-38.79%
ABCAmerisourceBergen Corp33.4422.41-32.98%
GIGMGigaMedia Ltd6.484.79-26.08%
LMTLockheed Martin Corp9974.03-25.22%
QCORQuestcor Pharmaceuticals Inc.6.925.52-20.23%
WTWWeight Watchers International Inc.31.5726.45-16.22%
GMEGameStop Corp.30.7526.24-14.67%
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Disclosure: Steve owns WTW

Joel Greenblatt and MagicFormulaInvesting.com are not associated in any way with this website. Neither Mr. Greenblatt or MagicFormulaInvesting.com endorse this website's investment opinions, 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. The information on this website is for informational purposes only and solely represents the views and opinions of the author. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind, nor can it be relied upon as the basis for stock trades. Alexander Online Properties LLC, the proprietor of this website, is not responsible in any way for losses or damages resulting from the use of this information. Alexander Online Properties LLC is not a registered investment advisor. All logos are trademarked properties of their respective companies.

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