To increase your likelihood to outperform the market, one method is to look for stocks that rank highly according to the "Magic Formula" criteria.
Designed by Joel Greenblatt (Trades, Portfolio), a successful 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 regarding 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.
Ault Global Holdings Inc
The first stock to consider is Ault Global Holdings Inc (DPW, Financial), a Las Vegas, Nevada-based manufacturer and global provider of electrical equipment and parts to the military, aerospace, medical, industrial and telecommunication industries.
The stock traded at $2.33 per share at close on Sept. 29 for a market capitalization of $135.11 million. As of the end of the second quarter, it had an earnings yield of 90.91% and a return on capital of 345.87%.
Ault Global Holdings Inc' earnings yield ranks better than 99.78% of 2,670 companies operating in the industrial products industry, while its return on capital ranks better than 99.47% of competitors.
The share price has risen by 22.5% over the past year to trade about 62.4% below the midpoint of the 52-week range of $1.44 to $10.94.
Currently, Ault Global Holdings Inc does not pay dividends.
Garrett Motion Inc
The second stock is Garrett Motion Inc (GTX, Financial), a Swiss manufacturer and distributor of turbochargers and electric-boosting technologies for light and commercial vehicles to original equipment manufacturers operating worldwide.
The stock traded at $7.44 per share at close on Sept. 29 for a market capitalization of $480.81 million. As of the second quarter, the earnings yield is 40.42% and the return on capital is 88.87%.
Garrett Motion Inc's earnings yield ranks higher than 97.44% of 1,172 companies operating in the vehicles and parts industry, while the return on capital ratio ranks better than 96.83% of competitors.
The share price has risen by 30% over the past year, to trade 4.64% above the midpoint of the 52-week range of $5.32 to $8.90.
Currently, Garrett Motion Inc does not pay dividends.
Labrador Iron Ore Royalty Corp
The third stock to consider is Labrador Iron Ore Royalty Corp (LIFZF, Financial), a Toronto, Canada-based holder of a 15.10% equity interest in Iron Ore Company of Canada, which is a producer of seaborne iron ore pellets and concentrate. The Labrador Iron asset also sells standard and low silica acid, flux and direct reduction pellets.
The stock traded at $26.63 per share at close on Sept. 29 for a market capitalization of $1.78 billion. As of the second quarter, it has an earnings yield of 9.01% and a return on capital of 1,759.97%.
Labrador Iron Ore Royalty Corp's earnings yield ranks higher than 52.63% of 608 companies that operate in the steel industry, and its return on capital ranks higher than 99.83% of competitors.
The share price has declined by 40.4% over the past year to trade about 12% below the midpoint of the 52-week range of $18.13 to $42.40.
On July 26, Labrador Iron Ore Royalty Corp paid a three-month dividend of 1.75 Canadian dollars ($1.38) per common share.
Disclosure: I have no position in any securities mentioned.
