Back in 2005, Joel Greenblatt introduced his ‘Magic Formula for Investing’ with The Little Book That Beats the Market. The book details a methodical approach that helps investors find some of the cheapest, most well-operated companies and buy them each month for a one-year holding period.
There is nothing truly “magical” about the formula, and we certainly don’t subscribe to the belief that any one tool will guarantee investment success. What we do believe is that the majority of stock market returns over the long-term usually come from just a handful of the best-performing names, and we should use every tool available to look for them.
It’s our job to find those big winners - the ones will end up on the fat tails of the distribution curve. Greenblatt’s results have shown that sometimes, the biggest winners come from the lowliest of beginnings.
We built our scan with that in mind, focusing first on the best companies in each sector (those that generate the highest returns) and then finding which stocks on that list are held least dear by investors.
Here’s a list of the top-ranked stocks in our universe:
Our goal here isn’t to buy the whole list.
Buying good companies at good prices is a fine place to start, but that alone isn’t enough. Often, there’s a reason that seemingly good companies are trading at rock-bottom prices, and buying them blindly can have us on the wrong side of prolonged downtrends.
The intrinsic value of a stock changes over time, so even cheap stocks that are bought below their current intrinsic value can lose over time. There’s no rule that says a stock price has to move towards its ‘true’ value - and it definitely doesn’t have to do it quickly.
That’s why we couple trend identification with our value scans to find the best companies with the best setups. Merging fundamental and technical analysis helps us manage risk and increases our odds of finding big winners with sustainable trends.
Here are our favorite setups from the list.
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