In order to increase your chances of beating the market, one method is to choose stocks that rank highly according to the “Magic Formula” criteria.
Created by Joel Greenblatt (Trades, Portfolio), a famous value investor and author of “The Little Book That Beats the Market,” the Magic Formula ranks stocks based on a specific array of technical criteria, the most important being the earnings yield and return on capital.
In Greenblatt’s book, these two financial ratios are defined a little differently than normal. Greenblatt calculates the earnings yield as earnings before interest and taxes (Ebit) divided by the enterprise value, while the return on capital is Ebit divided by net fixed assets and working capital.
In addition to high values with regard to these two financial ratios, Magic Formula stocks are further narrowed down to be U.S. companies with a market capitalization of more than $100 million, as businesses that do not meet these criteria have different capital structures. Also, the Magic Formula does not take into consideration financial and utility businesses for similar reasons.
Below are three stock picks that rank highly on the GuruFocus Magic Formula screener, a screener that is based on Greenblatt’s formula.
The first stock to consider is Co-Diagnostics Inc. (NASDAQ:CODX), a Salt Lake City, Utah-based manufacturer and seller of reagents used for nucleic acid test screening for several infectious diseases such as Covid-19, malaria, yellow fever, TBC and dengue.
The stock traded at $10.93 per share at close on Aug. 25 for a market capitalization of $315.77 million. As of the end of the second quarter, it had an earnings yield of 20.85% and a return on capital of 300.3%.
Co-Diagnostics’ earnings yield ranks better than 95.56% of 248 companies operating in the Medical Diagnostics and Research industry, while its return on capital ranks better than 97.13% of competitors.
The share price has fallen by 4.2% over the past year to trade about 21% below the midpoint of the 52-week range of $7.01 to $20.68.
Currently, Co-Diagnostics Inc is not paying dividends.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $23 per share.
The second stock is Lifevantage Corp (NASDAQ:LFVN), a Sandy, Utah-based distributor of nutritional and personal care products.
The stock traded at $7.57 per share at close on Aug. 25 for a market capitalization of $103.99 million. As of the second quarter, the earnings yield is 17.42% and the return on capital is 75.91%.
Lifevantage Corp’s earnings yield ranks higher than 90.79% of 1,770 companies operating in the Consumer-Packaged Goods industry, while the return on capital ratio ranks better than 93.73% of competitors.
The share price has decreased by 47.44% over the past year, representing a nearly 66% discount to the midpoint of the 52-week range of $6.50 to $15.71.
Lifevantage Corp does not pay dividends currently.
On Wall Street, the stock has one recommendation rating of hold and a target price of $7.50 per share.
The third stock to consider is Interfor Corp (IFSPF), a Canadian producer and seller of wood products.
The stock traded at $20.35 per share at close on Aug. 25 for a market capitalization of $1.29 billion. As of the second quarter, it has an earnings yield of 107.85% and a return on a capital of 137.73%.
Interfor Corp’s earnings yield ranks higher than 99.34% of 303 companies that operate in the Forest Products industry, and its eturn on capital ranks higher than 98.34% of competitors.
The share price has declined by 52.6% over the past year to trade about 18.5% below the midpoint of the 52-week range of $11.03 to $39.
On June 28, Interfor paid a special dividend of 2 Canadian dollars ($0.79) per common share, though it does not pay regular dividends.
On Wall Street, the stock has a median recommendation rating of buy with an average target price of approximately $36.20 per share.
Disclosure: I have no position in any securities mentioned.
This article first appeared on GuruFocus.
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