3 Magic Formula Stocks: Apple Inc (NASDAQ:AAPL), Bed Bath & Beyond Inc. (NYSE:BBBY), Best Buy Co. Inc. (NYSE:BBY)
The magic formula is a investing screening tool described in Joel Greenblatt’s book The Little Book That Beats The Market. The formula is intended to be used to select a portfolio with at around 20 to 30 stocks, bought in equal sizes. The Magic Formula was designed with the thought in mind that you would hold the stocks for one year then would run the screen again and establish a portfolio based on the latest financial statements. The one year period was designed with in order maximize your after-tax return due to long term capital gains.
The magic formula can also serve as an interesting stock screener. First you exclude utility and financial stocks and establish a minimum market capitalization.
How is the Magic Formula Calculated?
To calculate the actual magic formula you determine the company’s earnings yield which is EBIT divided by enterprise value., and the the company’s return on capital which is EBIT divided by net fixed assets plus working capital. All companies are ranked by the highest earnings yield and highest return on capital as ranked in percentages for the magic formula.
3 Magic Formula Stocks with Market Caps over $5B
1. Apple Inc (NASDAQ:AAPL)
Apple had a down quarter and still generated $14.142 billion EBIT. Even using that “down quarter” run rate you’d get $56.56 billion. While no-where near as good as the $72.5 billion they did in 2015, it’s still very solid. That gives the company between a 10 percent to 13 percent earnings yield. Apple may have more questions then they’ve had before but this is a company that is returning a lot of capital to shareholders and has a loyal user base at a cheap price. Even if iPhone upgrade cycles are longer, and there are some hiccups there is still a good chance there is value to be found.
2. Bed Bath & Beyond Inc. (NYSE:BBBY)
Bed Bath and Beyond generated $1.4B in EBIT in 2015 and has an enterprise value of $7.50B. This gives you a earnings yield of over 18 percent. The company earned almost $500 million in EBIT which is trending upwards from last year’s run-rate. There’s some concerns in that the company is dealing with headwinds like most retailers and gross and operating margins are falling but the company has a excellent balance sheet and generates solid free cash flow.
3. Best Buy Co. Inc. (NYSE:BBY)
Best Buy earned $1.390 billion in EBIT in 2015 and has an enterprise value of $7.81B for an earnings yield of 17.7 percent. While it is never good when the CEO substantially lowers his stake as Hubert Joly did by 44 percent, the company has a lucrative capital return plan and pays a solid dividend. After being left for dead 2 years ago, the company had a very strong holiday season, with not so good guidance going forward.
If you’re interested in finding more Magic Formula stocks visit www.magicformulainvesting.com. Magic Formula stocks are best bought in a basket to minimize risks, that is why Greenblatt suggests 20 to 30 stocks.
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