Hedge fund manager Joel Greenblatt, author of The Little Book that Beats the Market, uses what he calls a “magic formula” to earn returns that outperform the market. In a recent article for TheStreet.com, John Reese, CEO of Validea, explains Greenblatt’s strategy of focusing on return-on-capital and earnings yield to find “good companies at bargain prices.” But this straightforward, seemingly simple strategy is no magic bullet. It is based on a long-term view (3 to 5 years) and requires discipline to stay the course and ride out short term bumps in the road.
Here are five stocks that earn high marks from our Greenblatt model:
- Crane Co. (CR): Diversified manufacturer of engineered industrial products (market cap of $3.2 billion). Earnings yield of 28.26% and ROC of 83.87% more than satisfy this strategy’s requirements.
- Michael Kors Holdings Ltd. (KORS): Global accessories, footwear and apparel company (market cap of $8.2 billion). Earnings yield is a respectable 15.92%, and ROC shows well at 58.12%.
- Herbalife Ltd. (HLF): Global nutrition company (market cap of $5.0 billion). Both ROC and earnings yield get a thumbs up at 80.28% and 11.24%, respectively.
- Gilead Sciences, Inc. (GILD): Research-based biopharmaceutical company (market cap of $104.2 billion). This pharma giant well exceeds model benchmarks with an impressive earnings yield of 19.28% and robust ROC of 84.13%.
- HP Inc. (HPQ): Formerly Hewlett-Packard Company, this software products and technology provider (market cap of $19.7 billion) gets high marks with an impressive earnings yield of 24.65% and stellar ROC of 156.24%.