Joel Greenblatts Magic Formula is one of the most successful stock-picking strategies of all time.
First published within hisbookThe Little Book that Beats the Market, Greenblatts data showed that over a period of 17 years, stocks qualifying for the screen outperformed the market by around 30.8% per annum.
The Magic Formula screen looks for companies that are both cheap and produce a high return on investment. Every month, analysts at investment bankSocit Gnraleput out a list of companies that they believe qualify for the screen.
The banks analysts rank companies based in theirreturn on capital and valuation, using criteria similar to those devised by Greenblatt. Analysts place those companies with the highest return on capital, but lowest valuation at the top of the list.
All stocks in the FTSE World Developed and FTSE 350 indexes are included in the screen.
This month there were only five UK companies that made it into the top 25 qualifying companies.
Commercial banknote printer,De La Rue(LSE: DLAR) comes out on top thanks to the companys ability to literally print money.
Indeed, De La Rues ROCE a metric thatcompares how much money is coming out of a business, relative to how much is going in eclipses that of its peers.
During its last financial year, De La Rues ROCE totalled 49.6%. To put that into perspective, according to my figures less than 3% of the worlds 8,000 largest companies managed to achieve an ROCE of greater than 40% last year.
Moreover, the group currently trades at a historic P/E of 11.5.
Next to qualify is marketing giantWPP(LSE: WPP). WPPs strengths lie in the groups rapid growth over the past six years and the ability to create value for shareholders.
Since 2009, WPPs earnings per share have expanded at an annual clip of 18%. Over the same period, the companys shares have returned 17.9% per annum, outperforming the FTSE 100 by 9.1% p.a.
WPP currently trades at a forward P/E of 14.8 and supports a dividend yield of 3.1%.
Carillion(LSE: CLLN) qualifies for the Greenblatt screen due to the companys bargain basement valuation and steady ROCE.
Carillions ROCE has averaged 9.5% p.a. during the past six years, one of the highest returns in the construction sector. The company currently trades at a forward P/E of 9.6 and supports a dividend yield of 5.5%.
Mitie currently trades at a forward P/E ratio of 12.7 and supports a dividend yield of 3.8%. The companys ROCE has averaged 12.6% p.a. during the past six years. Since 2010, Mities earnings per share have increased at a steady 8% p.a. and this growth is set to continue.
City analysts expect Ladbrokes earnings per share to fallby a third this year. On this basis, the company is trading at a forward P/E of 17.7.
However, Ladbrokes is cheap on an enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) basis. The group trades at an EV/EBITDA multiple of 7.5, almost half the sector average of 14.
Ladbrokes supports a dividend yield of 5.8%.
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