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In this episode of Vox Screens Stocks, John Hughman & Justin Waite pick two stocks from Joel Greenblatt’s Magic Formula
Welcome back to our new podcast series Vox Screens Stocks. There are lots of ways of finding investment opportunities, but one of the most fruitful is to start your search by crunching stock market data. With thousands of listed companies, using tools to filter for certain financial characteristics can whittle the market down to a manageable number that you can use to focus your research efforts.
Each week we'll use a variety of stock screening approaches to come up with a list of stocks which fit the criteria of this week’s stock screener, then John & Justin will pick a stock from the list, explain what they like about it.
This week we are filtering using Joel Greenblatt’s Magic Formula
The Magic Formula was created by US asset manager Joel Greenblatt and popularised in his 2005 book “The Little Book That Beats the Market”. Repeated studies and backtests have shown that this simple mechanical approach delivers higher risk-adjusted returns than the overall market – Mr Greenblatt, in fact, claimed it delivered in excess of 30% a year when run on the US market.
The idea is essentially a value approach that allows investors to buy “good companies at cheap prices” as Mr Greenblatt put it. It ranks shares using two factors:
- Earnings Yield: Earnings Before Interest and Tax/Enterprise Value (market cap + debt/-cash), which is the inverse of the PE ratio and seen as a good way of determining whether a share is cheap or expensive. Much like the dividend yield, it essentially shows the percentage of earnings you get for the share price – just as you would if you owned the business outright – and allows comparison with other forms of ‘safe’ returns such as Gilts.
- Return on Capital Employed: Earnings Before Interest and Tax/Capital employed, which shows how efficiently as company uses its capital to generate profits.
Mr Greenblatt advocated buying a portfolio of the top 20-30 companies with market capitalisations above $100m, holding them for a year, then selling all of them before screening for a new selection.
We've also added columns in our table showing the forecast PE ratio to give an indication of cheapness. And you should also look at the numbers in the context of recent commentary from the company, particularly the latest outlook statements – Mr Greenblatt suggested weeding out anything from the results that you don’t like the look of. Always remember, numbers alone can mislead - stock screens are a starting point for further research.
Here are the results of this week's screen, ranked according to their Magic Formula score:
John & Justin's Pick is:
Somero Enterprises provides industry-leading concrete-levelling equipment, training, education and support to customers in over 90 countries. The Company's cutting-edge technology allows its customers to install high-quality horizontal concrete floors faster, flatter and with fewer people. Somero® equipment that incorporates laser-technology and wide-placement methods is used to place and screed the concrete slab in all building types and has been specified for use in a wide range of commercial construction projects for numerous global blue-chip companies.
Somero pioneered the Laser Screed® market in 1986 and has maintained its market-leading position by continuing to focus on bringing new products to market and developing patent-protected proprietary designs. In addition to its products, Somero offers customers unparalleled global service, technical support, training and education, reflecting the Company's emphasis on helping its customers achieve their business and profitability goals, a key differentiator to its peers.