Best Magic Formula investing stock ideas for 2020

Quantitative-Investing , momentum , Magic-Formula-Investing , Joel-Greenblatt

You can find our latest article on the best Magic Formula investment ideas here: Best Magic Formula Global Stock Picks 2024

In spite of the Magic Formula investment strategy struggling the past few years it is still a great investment strategy that you shouldn’t underestimate.

As you know all great investment strategies underperform the market some of the time.

This article gives you the best Magic Formula investing stock ideas for 2020:

Worldwide
in North America
in Europe and
in Asia

First a bit of background information.

Where does Magic Formula investing come from?

The Magic Formula investment strategy was developed by Joel Greenblatt and described in his excellent book called The Little Book that Still Beats the Market.

It is also the book that got me started with quantitative investing.

It finds quality undervalued companies

The Magic Formula helps you find quality companies that are trading at an attractive price.

It does this by looking for companies with a:

high earnings yield – EBIT to Enterprise Value (companies that are undervalued) and
high return on invested capital - Trailing 12 month EBIT / ((Current assets – Current liabilities) + Net Fixed Assets) (ROIC) (quality companies)

It then ranks the companies on ROIC (where 1 is the company with the highest ROIC), and by earnings yield (where 1 is the company with the highest earnings yield).

To get the Magic Formula rank the ROIC rank and earnings yield rankings are added together to give you a single ranking.

The best ranked Magic formula company is the one with the lowest Magic Formula rank (the lower the better ranked the company is).

Click here to start using the Magic Formula and Momentum in your portfolio NOW!

But the Magic Formula can be improved - a LOT

But you can improve the returns of the Magic Formula a lot, up to 600.5% in the back tests we have done in Europe over the 12 year period from June 1999 to June 2011.

Here are the Magic Formula only returns:

MF_single_factor

Magic Formula returns in Europe from June 1999 to June 2011 by company size.
Source: Quantitative Value Investing in Europe: What works for achieving alpha

We tested the Magic Formula with 13 other ratios

We then tested the Magic Formula with 13 other ratios and as you can see in the table below the returns of the strategy improved substantially.

Click image to enlarge
Magic Formula returns when combined with a third ratio in Europe from June 1999 to June 2011.
Source: Quantitative Value Investing in Europe: What works for achieving alpha

Look at column Q1

Look at the returns in column Q1, it shows the returns generated by first selecting the 20% best Magic Formula companies combined with the ratios in the column called Factor 2.

Best combination +783% was Momentum (600.5% improvement)

This means you could have earned the highest return of 783.3% over the 12 year period if you invested in the best ranked Magic Formula companies that also had the highest 6 month price index (share price momentum).

This is a 600.5% improvement over the best return of 182.8% you could have earned if you used only the Magic Formula to get investment ideas.

Now on to the investment ideas.

How to find your own Magic Formula investing ideas

To find out how you can find your own Magic Formula investing ideas look here: How to implement the Magic Formula investment strategy

Click here to start using the Magic Formula and Momentum in your portfolio NOW!

Here are the Magic Formula investment ideas

In the following back tests you can see investment ideas generated using only the Magic Formula (Standalone Magic Formula investment ideas) as well as ideas generated using the Magic Formula combined with Price Index 6 months (6 months momentum)