One way to increase your chances of outperforming the market is to look for stocks that rank well under the “magic formula” criteria.
Joel greenblatt (Trades, Portfolio), a successful value investor and author of “The Little Book that Beats the Market”, the Magic Formula ranks stocks based on a specific range of technical criteria, the most important of which is return on earnings and return on capital.
In Greenblatt’s book, these two financial ratios are defined a little differently than normal. Greenblatt calculates return on earnings as earnings before interest and taxes (Ebit) divided by company value, while return on capital is Ebit divided by net fixed assets and working capital.
In addition to the high values regarding these two financial ratios, Magic Formula shares are further reduced to US companies with a market capitalization of over $ 100 million, as companies that do not meet these criteria have capital structures. different. Additionally, the magic formula ignores financial and utility companies for similar reasons.
Below are three stock picks that rank very well in the GuruFocus Magic Formula sieve, a sieve based on the Greenblatt formula.
Global Management Ault Inc
The first stock to consider is Ault Global Holdings Inc (DPW, Financial), a Las Vegas, Nevada-based manufacturer and global supplier of electrical equipment and parts to the military, aerospace, medical, industrial and telecommunications industries.
The stock traded at $ 2.33 per share at the close on September 29 with a market cap of $ 135.11 million. At the end of the second quarter, it had a profit return of 90.91% and a return on capital of 345.87%.
Ault Global Holdings Inc’s profit return ranks better than 99.78% of the 2,670 companies operating in the industrials industry, while its return on capital ranks better than 99.47% of the competition.
The stock price has risen 22.5% in the past year to trade about 62.4% below the midpoint of the 52-week range of $ 1.44 to $ 10.94 .
Currently, Ault Global Holdings Inc does not pay dividends.
Garrett Motion Inc
The second title is Garrett Motion Inc (GTX, Financial), a Swiss manufacturer and distributor of turbochargers and electric supercharging technologies for light and commercial vehicles to original equipment manufacturers operating worldwide.
The stock was trading at $ 7.44 per share at the close on September 29 for a market cap of $ 480.81 million. In the second quarter, the profit return is 40.42%, and the return on capital is 88.87%.
Garrett Motion Inc.’s profit return ranks higher at 97.44% of the 1,172 companies operating in the vehicle and parts industry, while the return on capital ratio ranks better than 96.83% of the competition.
The stock price has risen 30% over the past year, trading 4.64% above the midpoint of the 52-week range of $ 5.32 to $ 8.90.
Currently, Garrett Motion Inc does not pay dividends.
Labrador Iron Ore Royalty Company
The third stock to consider is Labrador Iron Ore Royalty Corp (LIFZF, Financial), a Toronto, Canada-based holder of a 15.10% interest in Iron Ore Company of Canada, which is a producer of iron ore pellets and concentrate shipped by sea. The Labrador Iron asset also sells standard and low silica acid, flux and direct reduction pellets.
The stock was trading at $ 26.63 per share at the close on September 29 for a market cap of $ 1.78 billion. In the second quarter, it posted a profit return of 9.01% and a return on capital of 1,759.97%.
Labrador Iron Ore Royalty Corp’s profit return is over 52.63% of the 608 companies that operate in the steel industry, and its return on capital is over 99.83% of the competitors.
The stock price has fallen 40.4% in the past year to trade about 12% below the midpoint of the 52-week range of $ 18.13 to $ 42.40.
On July 26, Labrador Iron Ore Royalty Corp paid a three-month dividend of Canadian dollar 1.75 ($ 1.38) per common share.
Disclosure: I have no position on the titles mentioned.