The Best Magic Formula Stocks
Joel Greenblatt's Magic Formula Investing stock strategy delivered an amazing 30% annual return to investors over a 17 year period. However, many who have tried it in practice have been disappointed by buying into value traps, leaving them with painful losses. MagicDiligence researches Magic Formula stocks and recommends only the best of the lot.
Top Buy Picks
Updated daily. All values annualized from Jan. 2008.
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The Little Book That Beats The Market, by Joel Greenblatt, was a milestone book in value investing. In a short 155 pages that can be read in 2 hours and understood by anyone, Mr. Greenblatt concisely lays out a simple investment strategy where stocks are picked by only 2 factors: pre-tax return on tangible capital (ROTC), and earnings yield. A high ROTC is a sign of a good company. A high earnings yield is a sign of a cheap stock. The "Magic Formula" simply ranks all U.S. stocks by both metrics, adds them together, and buys the highest ranked stocks. Simple, right? And to simplify things even more, Mr. Greenblatt advises to buy 5-7 stocks every few months, holding them for a year and then selling, replacing with new picks. He even created a website, www.magicformulainvesting.com, that lists all the current stocks by his rankings. It couldn't be more simple. But look at the returns! From
a 17 year period starting in 1988, following this "Magic Formula"
produced 30.8% annual investment returns vs. 12.4% annually for the
market at large. These unbelievable results would turn an initial investment
of $15,000 into over 1.4 MILLION DOLLARS in just 17 years!
What's The Catch?A 30% annual investment return is almost unbelievable. Even Warren Buffett's legendary Berkshire Hathaway hasn't approached such lofty returns. However, when Magic Formula Investing (MFI) is applied in practice, some kinks in the armor appear. Specifically, the Magic Formula tends to turn up some stinkers along with the flowers. Fad stocks pop up after the fad has run its course. Consider the case of Crocs (CROX), a Magic Formula stock in early 2008 at $21, which subsequently dropped 94% over the next 12 months. Or Heely's (HLYS), which in the same period fell from $4.50 to $1.50, a 73% decline. It also does not guard you against firms with looming financial issues that could threaten viability. Idearc (IAR), a phone book publisher, was on the MFI screen in early 2008 at about $10. What the screen did not tell you is that Idearc was saddled with a massive debt load and declining sales, a true recipe for disaster. Those who chose Idearc would have been completely wiped out over the next year when the company went bankrupt. Some MFI stocks are also stuck in declining businesses with permanent downtrends in revenue, a slow and painful death for a business. Westwood One (WON) appeared on the MFI screen, but the company relied on the dying business of terrestrial radio. MagicDiligence warned members against this one, and it too went to zero over the next year. There are great stocks in Magic Formula Investing - stocks with good growth prospects, excellent financial health, and strong competitive positions. That 30.8% annual return is an average - warts and all. Imagine what the returns could be if you could remove out the laggards from this mechanical screen?  The MagicDiligence MissionThe mission of MagicDiligence is to find Magic Formula stocks with good growth prospects, outstanding financial health, and strong, durable competitive positions. At the same time, I aim to protect you from buying MFI stocks that do not meet these criteria. By doing this, we can make a great mechanical strategy even better. When you join me, editor Steve Alexander, as a MagicDiligence Member, you get these benefits:
Unlike many newsletters, I benchmark my Top Buys against the most popular S&P 500 index fund - the S&P Depository Receipts (SPYDR, ticker SPY). Also unlike most newsletters, MagicDiligence tracks dividend earnings - an important component of stock market returns. As per the Magic Formula, each Top Buy pick will be held for one year. After that holding period, if the pick has dropped out of the Magic Formula, it will be sold and replaced. If it remains, the pick will be held for another year, and so on. Because we analyze each pick to ensure it has outstanding investment potential, our picks should drop out of the Magic Formula due to stock price increase instead of poor business results. In addition, for each Top Buy, MagicDiligence provides a "Sell Early" price which, if reached, represents a fair value which both provides a substantial return on investment and also limits expected future gains. By doing this, we prevent the case where picks shoot up in value only to decline again by the end of the one-year holding period. Each stock report MagicDiligence produces is detailed, well researched, and covers the following points:
Research for Do-It-Yourself Magic Formula InvestorsIf you already follow the Magic Formula, and prefer to pick your own stocks, a MagicDiligence Membership also provides analysis on stocks in the Magic Formula screen, as well as foreign stocks and other issues that have the characteristics of Magic Formula stocks. Each analysis provides a detailed background, and examines the stock's growth potential, financial health, and competitive positioning. This gives the MFI investor more than just a list to help choose his or her portfolio. Small-Cap Research You Can't Find ElsewhereDetailed research on small cap stocks is hard to find. Large research services don't bother to cover small caps because of a relative lack of interest from their institutional clients. Little information and almost no opinions exist on these stocks due to their obscurity. Newsletters that follow small-caps usually cost hundreds to thousands of dollars a year. However, small-cap stocks have provided the best overall return over long periods of time. The Magic Formula screen is littered with excellent and cheap small-cap stocks. By using MagicDiligence's research and opinions, the small-cap investor can quickly produce a list of attractive opportunities, while avoiding the not-so-attractive ones. Low Maintenance Investors WelcomeWhile MagicDiligence's research reports are very useful to those who follow other strategies or prefer to pick their own portfolio, the service is also perfect for low-maintenance investors who just want to buy recommended stocks. MagicDiligence provides a new "Top Buy" pick - an MFI stock with exceptional investment characteristics - every 2 weeks. By following these picks, low-maintenance investors would have beaten the S&P 500 by several percentage points annually since inception. Members Love the ServiceMagicDiligence members love the service and the value it provides. Here are some recent comments from members: "Having been a member going on two years now I have been able to turn my portfolio around using your recommendations from a devastating 43% loss two years ago to a 20% gain this last year. Still down 26% but gaining ground quickly. I fell in to the trap using the Magic Formula screen and attempting to perform my own research on the hundreds of stocks that it generated to my own financial demise. THANK YOU!" - Alan W., 1/21/10 "Your analysis is really amazing - instead of company history summaries that are sort of cut-and-pastes from Yahoo Finance profiles, it's like you've been tracking or working at these companies for years." - Brent M., 1/14/10 "Love, love, love your site, so glad to be a member..." - Debra M., 1/6/10 "I find your site extremely useful. I have been purchasing Magic stocks for about 2.5 years, and I would probably have stopped if I had not had access to the information on your site." - Robert H., 12/30/09 "I think your site is a perfect complement to the MFI site, and to the MF approach more broadly. You do a great job of sifting out the "imposters" that sometimes sneak by MFI's numerical screens for one-off or unsustainable reasons; and also (of course) of calling attention to the true gems that get through the screens." - Rob R., 10/24/09 "just wanted to thanks you for your excellent website... I would easily pay double for your service (or more)." - Edward K., 8/21/08 "Thanks for the great stock picking work! I lost a lot of money in the year I attempted to use MFI on my own with only minor vetting, and was seriously thinking of giving up on it, even though I thought the premise was sound. But I didn't feel interested or capable of doing more thorough sorting through of stocks on my own. Your service is just what I needed!" - John E., 8/11/08 "I'm still investing with the Magic Formula, but I've added the Magic Diligence service to it, which has been wonderful. It seeks out those MF picks that have a large moat and avoids many stocks that appear in the MF list for the wrong reason... Letting Magic Diligence do the research for me has been improving my results." - William I., 7/31/08
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