The Magic Formula, introduced in “The Little Book That Beats the Market,” distills the complexity of stock selection into a straightforward two-part analysis. At its core, the method examines Return on Capital, which measures how efficiently a company transforms its resources into profits, and Earnings Yield, which indicates whether a stock’s price is favorable relative to its earnings potential.
This approach distinguishes itself by integrating these metrics into a ranking system that automatically identifies two coveted characteristics: exceptional business performance and attractive pricing. By focusing on both factors simultaneously, investors can uncover high-quality companies trading at reasonable valuations. Perhaps most importantly, Greenblatt’s formula takes what traditionally demanded extensive financial expertise and converts it into a clear, repeatable strategy that everyday investors can confidently implement in their own portfolio decisions.
What makes the Magic Formula particularly valuable in today’s information-saturated investment landscape is its ability to cut through market noise and emotional decision-making. By providing a systematic framework based on fundamental business principles rather than market sentiment or timing, it helps investors maintain discipline during volatile periods when psychological biases often lead to poor investment choices. This methodical approach not only simplifies the investment process but also potentially shields investors from the common pitfalls of overreaction and short-term thinking that frequently undermine long-term returns.
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Here are the top 10 stocks using Validea’s strategy based on Joel Greenblatt’s Magic Formula for February of 2025.
| Ticker | Company Name | Earnings Yield Investor | Price | Market Cap ($mil) | PE Ratio | Price/ Sales | Relative Strength | Price/ Book | Price/ Cash Flow | Return on Capital | Earnings Yield |
|---|---|---|---|---|---|---|---|---|---|---|---|
| BMBL | BUMBLE INC | 100 | $5.28 | $571 | 13.6 | 0.5 | 19 | 0.7 | 24.4 | 89.6% | 24.2% |
| LEN | LENNAR CORP | 100 | $121.52 | $32,126 | 8.5 | 0.9 | 41 | 1.2 | 7.9 | 82.3% | 16.4% |
| TMHC | TAYLOR MORRISON HOME CORP | 100 | $62.30 | $6,338 | 7.5 | 0.8 | 68 | 1.1 | 6.8 | 87.7% | 15.1% |
| CROX | CROCS INC | 100 | $104.93 | $5,882 | 6.6 | 1.4 | 44 | 3.2 | 5.8 | 66.1% | 14.8% |
| JILL | JJILL INC | 100 | $24.46 | $375 | 8.7 | 0.6 | 51 | 3.6 | 5.9 | 49.1% | 20.0% |
| STNE | STONECO LTD | 100 | $9.48 | $2,904 | 8.3 | 1.3 | 26 | 1.1 | 5.6 | 43.2% | 42.0% |
| GTX | GARRETT MOTION INC | 100 | $9.99 | $2,048 | 7.9 | 0.6 | 63 | 0.0 | 5.5 | 58.9% | 13.6% |
| MBC | MASTERBRAND INC | 100 | $14.49 | $1,850 | 15.0 | 0.7 | 45 | 5.4 | 9.1 | 49.2% | 14.6% |
| BLBD | BLUE BIRD CORP | 100 | $35.15 | $1,129 | 10.9 | 0.8 | 64 | 6.3 | 10.1 | 55.1% | 12.4% |
| KAR | OPENLANE INC | 100 | $21.41 | $2,289 | 35.7 | 1.3 | 84 | 1.7 | 14.2 | 51.3% | 12.0% |
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