One very popular screen is Joel Greenblatt’s ‘Magic Formula’ which he talks about in his best selling book “The Little Book that Beats the Market”. This screen is a ranking system using ‘return on capital’ and ‘earnings yield’. Using Greenblatt’s definitions I re-created the screen. For specifics regarding the calculations please scroll to the bottom of the post. The 50 top ranking companies are shown below in alphabetical order.
| Ticker | Name | Revenue T12M | Market Cap |
| ACTG | ACACIA RESEARCH | 108.67M | 163.33M |
| ACOR | ACORDA THERAPEUT | 588.93M | 864.21M |
| AGX | ARGAN INC | 680.56M | 685.80M |
| BBSI | BARRETT BUS SVCS | 940.44M | 468.61M |
| BPT | BP PRUD BAY-RTU | 87.05M | 708.34M |
| BPI | BRIDGEPOINT EDUC | 463.19M | 271.77M |
| CWH | CAMPING WORLD-A | 5.91B | 1.97B |
| CSIQ | CANADIAN SOLAR I | 4.10B | 862.32M |
| CHKR | CHESAPEAKE GRANI | 14.65M | 78.31M |
| CXDC | CHINA XD PLASTIC | 1.37B | 180.78M |
| CNCE | CONCERT PHARMACE | 154.34M | 316.57M |
| DHX | DHI GROUP INC | 188.03M | 107.45M |
| DLHC | DLH HOLDINGS COR | 131.14M | 66.88M |
| DXC | DXC TECHNOLOGY C | 23.92B | 27.10B |
| ESRX | EXPRESS SCRIPTS | 100.47B | 53.18B |
| FCAU | FIAT CHRYSLER AU | 111.31B | 28.36B |
| FNJN | FINJAN HOLDINGS | 105.73M | 120.42M |
| F | FORD MOTOR CO | 158.66B | 39.26B |
| GM | GENERAL MOTORS C | 140.26B | 49.83B |
| GILD | GILEAD SCIENCES | 23.20B | 97.89B |
| CO | GLOBAL CORD BLOO | 945.62M | 769.65M |
| GGROU | GOLDEN GROWERS C | 48.87M | 57.31M |
| HRB | H&R BLOCK INC | 3.17B | 5.37B |
| HPQ | HP INC | 57.03B | 40.87B |
| IMMR | IMMERSION CORP | 110.32M | 313.24M |
| IDCC | INTERDIGITAL INC | 459.63M | 2.78B |
| IPG | INTERPUBLIC GRP | 8.41B | 8.90B |
| KGJI | KINGOLD JEWELRY | 2.46B | 68.10M |
| LGIH | LGI HOMES INC | 1.47B | 1.14B |
| CALL | MAGICJACK VOCAL | 82.45M | 137.75M |
| MSGN | MSG NETWORKS- A | 696.65M | 1.85B |
| NHTC | NATURAL HEALTH | 189.50M | 274.96M |
| OMC | OMNICOM GROUP | 15.39B | 15.91B |
| PCAR | PACCAR INC | 21.97B | 25.31B |
| PTN | PALATIN TECH INC | 67.13M | 202.05M |
| PERI | PERION NETWORK L | 266.02M | 82.42M |
| PBI | PITNEY BOWES INC | 3.74B | 1.41B |
| PINC | PREMIER INC-CL A | 1.66B | 5.78B |
| MARK | REMARK HOLD INC | 75.48M | 115.50M |
| PER | SANDRIDGE PERMIA | 28.39M | 133.88M |
| SINA | SINA CORP | 1.92B | 5.03B |
| SORL | SORL AUTO PARTS | 462.64M | 84.56M |
| SPWH | SPORTSMAN’S WARE | 844.63M | 261.92M |
| SWKH | SWK HOLDINGS | 30.14M | 126.46M |
| TRNC | TRONC INC | 1.40B | 587.94M |
| TUP | TUPPERWARE BRAND | 2.21B | 1.73B |
| UTHR | UNITED THERAPEUT | 1.74B | 5.35B |
| EGY | VAALCO ENERGY | 87.41M | 140.89M |
| WHR | WHIRLPOOL CORP | 21.17B | 7.99B |
| XOMA | XOMA CORP | 44.26M | 132.94M |
| Source: Bloomberg | |||
Now let’s assume we only want companies that have been growing over the last 12 months their revenues and basic earnings per share. Let’s say we also want to exclude those companies with a total debt to EBITDA of more than 5x and illiquid stocks (leave those with a trading volume of at least $1m per day). That leaves us with 17 companies. These are:
Keep in mind that Express Scripts (ESRX) and Cigna (CI) are merging and that MSGN was recommended by Jonathan Boyar at the London Value Investor event (see my post). HPQ and UTHR also appear in my value model as cheap. I owned HPQ in the past and shareholders did well as they restructured the business over the last few years. Essentially, HP Enterprises (HPE) was spun off which then spun off a division that merged with Computer Sciences to form DXC Technology (DXC) and which then spun off Perspecta (PRSP). I presented DXC at last year’s Cyprus Value Investor Conference and it did well producing a 32% total return over a year. Not enough to win me the trophy but good enough for 4th place 🙂
Screens can be a great starting point but not a substitute for research. I am sure there are value traps in these tables but also opportunities. I hope the above helps and wish you the best of luck!
Some points regarding the calculations:
- Universe: All shares whose primary security is in the United States. Excluding receipts, financials, utilities, and managed care. Also excluded are stocks with a market cap less than $50m or with $0 revenue.
- Return on capital = EBIT / (Capital Employed – Short-term debt – Excess Cash)
- Capital Employed = Net Fixed Assets + Current Assets – Current Liabilities
- This approach was used in order to best replicate Greenblatt which uses Net Working Capital. It’s a workaround based on the data I have access to.
- Earnings yield = EBIT / adjusted Enterprise Value
- adjusted Enterprise Value = Enterprise Value + Underfunded Pension Liabilities
