Magic Formula Index - Year Two
A year ago today, we introduced the Magic Formula Index, inspired by The Little Book That Beats the Market
Greenblatt claims an enviable record of 40% annual returns since 1985 in his private investment firm Gotham Capital. In the Little Book (it really is little!), Greenblatt lays out a simple strategy that just seems to work. He contends you should buy 20 to 30 stocks each year with the highest pre-tax earnings yield (the inverse of price to earnings ratio) and the highest return on capital. That's all there is to it. Sit back and beat the market. If you applied this magic formula since 1988, you would have realized a 30.8% annual return. Not bad, particularly when the S&P 500 produced a 12.4% annual return over the same period.
This is year two of testing Greenblatt's magic formula. Here's how it works:
For the next year I will keep track of his results. We'll call it the MagicFormula Index. From his website www.MagicFormulaInvesting.com, I applied his formula and ran the following search: top 25 companies with a minimum market capitalization of $100 million. Here are the results and closing prices as of December 12. Let's invest a fictional $100,000 and see where we end up on December 12, 2008.
- Accenture Ltd. (ACN), $34.65
- Aspreva Pharmaceuticals Corp. (ASPV), $25.77 (second year on the list)
- Avici Systems Inc. (AVCI), $7.35
- Barrett Business Services Inc. (BBSI), $18.14
- Biovail Corp. (BVF), $14.73 (second year on the list)
- China 3C Group (CHCG), $3.81
- Cutera Inc. (CUTR), $15.72
- Freight Car America Inc. (RAIL), $35.17 (second year on the list)
- Heelys Inc. (HLYS), $6.05
- Heidrick & Struggles International Inc. (HSII), $34.45
- ICF International Inc. (ICFI), $25.79
- Idearc Inc. (IAR), $17.51
- Intevac Inc. (IVAC), $16.34
- King Pharamceuticals Inc. (KG), $10.25 (second year on list)
- Korn/Ferry International (KFY), $19.71 (second year on the list)
- Pacer International (PACR), $14.36 (second year on the list)
- Palm Inc. (PALM), $5.49 (second year on the list)
- Palomar Medical Technologies Inc. (PMTI), $20.14
- Replidyne Inc. (RDYN), $4.01
- Silicon Image Inc. (SIMG), $4.88
- Travelzoo (TZOO), $15.14
- Trident Microsystems Inc. (TRID), $6.95
- USA Mobility (USMO), $13.50
- United Online Inc. (UNTD), $11.25 (second year on the list)
- ViroPharma Inc. (VPHM), $8.55 (second year on the list)
The Sacramento Executive
Comments
ACN is one of the stocks that keeps making it onto the magic formula filter. I think that this is mostly due to it's high ROC. The problem with this methodology is that it does not properly value or account for a consulting firm's most valuable asset - human capital. His formula does not quantify the value of the human element, which is the only thing that really matters in that particular industry.
Posted by: Jose | February 19, 2008 5:06 PM