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Investing’s ‘Magic Formula’ Points to AAPL, Gun Stocks

iPhones and other big names appear on Greenblatt's Magic Formula screen


I’m always a little skeptical of any stock market screen called a “magic formula,” but I do like to consult Joel Greenblatt’s screener from time to time.

Greenblatt, who made the screen famous in his book The Little Book that Beats the Market ranks stocks using two criteria:

  1. Valuation, as measured by the earnings yield (defined by Greenblatt as EBIT / Enterprise Value)
  2. Profitability, as measured by Greenblatt’s preferred metric, Return on Capital

There is really nothing “magical” about it. It’s simply a screen that looks for highly-profitable companies trading at cheap prices. And good analysts can use the list as a starting point for further research.

With that said, I want to highlight a handful of well-known stocks that made the cut on the screen this week:

Company Ticker Price Date Most Recent Financials
Apple AAPL 10/30/2013 9/30/2013
Cisco Systems CSCO 10/30/2013 7/31/2013
Coach COH 10/30/2013 9/30/2013
Microsoft MSFT 10/30/2013 9/30/2013
Smith & Wesson SWHC 10/30/2013 7/31/2013

As you might expect from any list of stocks on a value screens, all of these companies have challenges. We all know that Apple’s growth is slowing and that its product lineup isn’t as innovative as it was under Steve Jobs. Cisco and Microsoft have had a hard time adjusting to the mobile era. Coach is struggling from weakness in its core market — “aspirational” middle-class American women. And Smith & Wesson is facing slower sales in the years ahead, as a lot of would-be buying was pulled forward by fears of new government gun control.

Yet all of these companies are wildly profitable, all have very low debt and very little risk of financial distress, and all but Smith & Wesson pay a respectable and growing dividend.

As you rebalance your portfolio in the final months of 2013, give the Magic Formula stocks a look. Over any reasonable investment time horizon, “cheap and profitable” is a winning combination.

Sizemore Capital is long CSCO and MSFT. This post first appeared on TraderPlanet.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

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