To increase their chances of beating the market, one method investors could try is to look for stocks that rank highly based on
Greenblatt is a successful value investor and the author of “The Little Book That Beats the Market.” His “Magic Formula” ranks stocks based on a specific array of technical criteria, the most important being the earnings yield and return on capital.
In his 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 enterprise value, while the return on capital is Ebit divided by net fixed assets and working capital.
In addition to high values regarding these two financial ratios, Magic Formula stocks are further narrowed down to be companies with a market capitalization of more than $100 million, as businesses that do not meet these criteria have different capital structures. Also, the formula does not take into consideration financial and utility businesses for similar reasons.
Below are four stock picks that rank highly on the GuruFocus Magic Formula screener, which is based on Greenblatt’s formula.
The first stock is Alector Inc. (
ALEC, Financial), a San Francisco-based biopharmaceutical developer of clinical-stage treatments for neurodegenerative diseases. In the pipeline of treatments under development, the most advanced project appears to involve a product called AL001, which is in Phase III clinical trials for the treatment of frontotemporal dementia, Alzheimer’s disease, Parkinson’s disease and amyotrophic lateral sclerosis.
The company is partnering with GSK PLC (
The stock closed at $10.99 per share on Sept. 8 for a market capitalization of $907.38 million. GuruFocus data shows the company’s earnings yield is 47.62% versus the industry median of -10.53%. The return on capital is 68.05% versus the industry median of -482.48%.
The stock is down 51.71% from last year’s level and is trading well below the midpoint of the 52-week range of $7.50 to $27.05.
Alector does not pay dividends.
Warrior Met Coal
The second stock to consider is Warrior Met Coal Inc. (
HCC, Financial), a Brookwood, Alabama-based producer and exporter of non-thermal metallurgical coal for the steel industry in Europe, South America and Asia. The company extracts the raw material from underground deposits in Alabama, which also produces natural gas as a byproduct.
The stock closed at $29.77 per share on Sept. 8 for a market capitalization of $1.54 billion. The company has an earnings yield of 60.24% (versus the industry median of 10.99%) and a return on capital of 145.64% (versus the industry median of 13.60%).
The stock has risen 12.55% in the past year to trade slightly below the midpoint of the 52-week range of $20.25 to $42.95.
The company currently pays quarterly cash dividends, with the most recent payout of 6 cents per common share (the same as the previous one) being issued on Aug. 18. The company also paid a special dividend of 80 cents per share on Aug. 29. As such, at the time of writing, the stock offers a trailing dividend yield of 0.8% and a forward dividend yield of 0.84%.
The third stock to consider is VAALCO Energy (
The stock closed at $4.53 per share on Sept. 8 for a market capitalization of $271.01 million. The company has an earnings yield of 44.25% versus the industry median of 5.25%. The return on capital is 205.15% versus the industry median of 9.43%.
The stock is up 82.66% compared to last year, trading below the midpoint of the 52-week range of $2.40 to $8.77.
The company currently pays quarterly cash dividends, with the next payment of 3.3 cents per common share (in line with the previous one) to be issued on Sept. 23. As such, at the time of writing, the stock offers a trailing dividend yield of 2.16% and a forward dividend yield of 2.85%.
The fourth stock to consider is Unit Corp. (
UNTC, Financial), a Tulsa, Oklahoma-based explorer, acquirer, developer and miner of U.S. oil and natural gas properties in Oklahoma, Texas, Colorado, Kansas, Louisiana, Montana, New Mexico, North Dakota , Utah and Wyoming. The company drills onshore oil and natural gas wells for a number of other oil and natural gas companies as well as buys, sells, collects, processes and treats natural gas for third parties.
The stock closed at $59.50 per share on Sept. 8 for a market capitalization of $581.90 million. The company has an earnings yield of 60.24% (versus the industry median of 5.27%) and a return on capital of 119.04% (versus the industry median of 9.43%).
The share price has risen 120.37% in the past year to trade below the midpoint of the 52-week range of $24.50 to $65.50.
Unit does not pay dividends.
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