Greenblatt’s Magic Formula-Worthy Picks

Most investors lack patience and don’t understand underperformance, which motivates them to abandon funds when performance dips—precisely the time they shouldn’t, says Joel Greenblatt, co-founder of Gotham Asset Management. In a recent Forbes article, Validea CEO John Reese explains the fundamentals of Greenblatt’s “Magic Formula,” which uses return-on-capital and earnings yield to identify good companies selling for bargain prices.

Reese identified the top ten Magic Formula picks and, including the following four that also earn high marks from other guru strategies:

  • Natural Health Trends (NHTC) is a direct-selling and e-commerce company that sells personal care, wellness and quality-of-life products. In addition to solid earnings yield and ROC, the company scores well based on its ratio of price-earnings to earnings-per-share growth (PEG ratio).
  • HP (HPQ) is a provider of personal computing and other access devices with per-share cash flow of double the market mean as well as a favorable price-sales ratio (which indicates good value).
  • Monster Beverage (MNST), through its subsidiaries, markets and distributes energy drinks. The company is favored for it strong brand recognition and durable competitive advantage as well as earnings predictability and growth in earnings-per-share.
  • Tegna (TGNA) includes a portfolio of media and digital businesses that provide content. Earnings yield, return-on-total capital as well as a modest price-earnings ratio make this stock attractive.

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