From the Ground Up: Stocks to Watch from Our Latest Scan - 11/8/2023
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 “magical” about the formula (or our variations of it), and the use of the formula does not guarantee investment success. Obviously. But Greenblatt’s own results have shown the value of utilizing this simple approach.
We built this scan with the Magic Formula in mind, focusing first on the best companies (those that generate the highest returns on invested capital) and then finding which stocks on that list are held least dear by investors. In our results, we’re seeing a lot of homebuilders, energy producers, and industrial suppliers. That makes sense with where sentiment is in the market today. All three of those groups have experienced strong revenue and earnings growth over the past few years, but with the impact of high interest rates coming due and recession risks on the rise, the consensus believes those fundamental performances aren’t sustainable. Here’s the full 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 sustained downtrends. That’s why we couple trend identification and relative strength along with our fundamental scans.
Below, we highlight our favorite names.