For a higher chance to beat the market, one method investors could try is to look for stocks that rank highly on Joel Greenblatt (Trades, Portfolio)'s Magic Formula criteria.
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 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 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 four stock picks that rank highly on the GuruFocus Magic Formula screener, which is based on Greenblatt's formula.
Mueller Industries Inc.
The first stock to consider is Mueller Industries Inc. (MLI, Financial), a Collierville, Tennessee-based manufacturer and seller of metal and plastic products.
The stock closed at $58.09 per share on Jan. 14 for a market capitalization of $3.33 billion. GuruFocus indicates the company’s earnings yield is 21.55% (versus the industry median of -3.93%) and its return on capital is 92.85% (versus the industry median of 13.40%).
The share price has risen by 51.63% over the past year to trade significantly above the midpoint of the 52-week range of $34.06 to $63.07.
Currently, Mueller Industries Inc. pays quarterly dividends. The last payment of 13 cents per share was issued on Dec. 17, 2021, determining trailing 12-month and forward dividend yields of 0.9%.
Hess Midstream LP
The second stock is Hess Midstream LP (HESM, Financial), a Houston, Texas-based crude oil and natural gas midstream operator with 1,350 miles of gathering pipeline, plus processing and fractionation plants, terminals, rail cars and header systems located in Texas, North Dakota and Minnesota.
The stock closed at $30.22 per share on Jan. 14 for a market capitalization of $1.02 billion. GuruFocus data shows the company’s earnings yield is 18.02% (versus the industry median of 2.2%) and the return on capital is 20.87% (versus the industry median of 3.41%).
The share price has risen by 32.72% over the past year to trade significantly above the midpoint of the 52-week range of $20.36 to $30.71.
Currently, Hess Midstream LP pays quarterly dividends. The last payment of 51 cents per share was made on Nov. 12, 2021, determining a forward dividend yield of 6.75%.
Corsair Gaming Inc.
The third stock to consider is Corsair Gaming Inc. (CRSR, Financial), a Fremont, California-based computer hardware company specializing in gaming and streaming peripherals that designs and markets in North America and internationally. The company also offers gaming components and systems.
The stock closed at $20.72 per share on Jan. 14 for a market capitalization of $1.95 billion. The company has an earnings yield of 6.21% (versus the industry median of 3.52%) and a return on capital of 17.48% (versus the industry median of 12.89%).
The share price has dropped 45.08% over the past year to trade significantly below the midpoint of the 52-week range of $19.74 to $49.60.
Corsair Gaming Inc. is not paying dividends.
Zedge Inc.
The fourth stock to consider is Zedge Inc (ZDGE, Financial), a New York-based operator of a digital publishing and content platform, enabling global consumers to personalize their mobile devices by downloading ringtones, home screen app icons, wallpapers, widgets and notification sounds.
The stock closed at $8.63 per share on Jan. 14 for a market capitalization of $124.15 million. The company has an earnings yield of 6.70% (versus the industry median of 0.94%) and a return on capital of 534.85% (versus the industry median of 16.79%).
The stock price is up 17.90% over the past year but remains well below the midpoint of the 52-week range of $6.81 to $19.90.
Zedge Inc. does not pay dividends.
