Joel Greenblatt (Trades, Portfolio) introduced the investing world to the “Magic Formula” when he published his 2005 book, “The Little Book That Beats the Market.” The idea behind the Magic Formula is to apply a simple mathematical formula to find profitable businesses that trade at bargain prices.
The formula ranks companies based on the combination of two metrics: earnings yield and return on capital. The earnings yield, which is defined as earnings before interest and taxes divided by enterprise value, measures how much the company earns compared to how much the stock is valued by the market. The return on capital, which is defined as EBIT divided by the sum of net fixed assets and net working capital, measures how much a company earns compared to what it spends to produce those earnings.
As the formula works best when applied to U.S. companies and companies with market caps of at least $100 million, stocks that do not meet these criteria are often excluded. Due to having unique capital structures, utilities and financial companies are also not normally considered.
However, even though there are exceptions to the Magic Formula as Greenblatt defined it, the basic pillars of this valuation method – yearnings yield and return on capital – remain powerful tools to assess the attractiveness of potential investments. This is why GuruFocus’ Magic Formula Screener focuses more on ranking stocks based on these two criteria rather than the exclusions, though GuruFocus users still have the option to add the exclusions to this screener if they wish.
We will be taking a look at high-quality companies around the world that rank at the top of the GuruFocus Magic Formula Screener. In order to focus on high-quality companies with relatively reliable earnings and financial numbers, I have limited the results to those with a market cap of at least $1 billion and a GuruFocus business predictability rank of at least three out of five stars.
U.S. – Boise Cascade
In the U.S., the stock that ranks at the top of the GuruFocus Magic Formula list based on the above criteria is Boise Cascade Co. (BCC, Financial), a manufacturer and wholesale distributor of wood products and building materials headquartered in Boise, Idaho.
Boise Cascade has a business predictability rank of three out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the high single-digits in the past.
The company has an earnings yield of 42.38%, which is higher than 96% of industry peers, and a return on capital of 93.04%, which also outperforms 96% of competitors.
On Sept. 16, shares of Boise Cascade traded around $54.45 for a market cap of $2.14 billion. The GuruFocus Value chart rates the stock as fairly valued.
Boise Cascade is benefitting from an increase in housing demand in the U.S., as more houses built means higher demand for building materials. Fortunately for the company, this isn’t just a short-term tailwind – U.S. homebuilders have been underbuilding since the Financial Crisis, and the gap between new household formation and new homes built has surpassed 5 million since 2012.
Asia – Sitronix Technology
In the Asia region, the stock that ranks at the top of the GuruFocus Magic Formula list based on the criteria is Sitronix Technology Corp. (TPE:8016, Financial), a Taiwan-based fabless semiconductor company that develops display driver ICs (DDIs) for industrial displays, mobile phones, artificial intelligence and internet of things devices.
Sitronix has a business predictability rank of five out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the double digits in the past.
The company has an earnings yield of 22.84%, which is higher than 97% of industry peers, and a return on capital of 400.73%, which outperforms 99% of competitors.
On Sept. 16, shares of Sitronix traded around 259 New Taiwan dollars ($9.33) for a market cap of NT$31.06 billion. The GF Value chart rates the stock as modestly overvalued.
Sitronix operates in several high-growth industries, particularly semiconductors for mobile phone and automotive applications. Its AI and IoT applications are also expected to show strong growth in the future, though these industries may yet take years to begin reaching their real growth potential. It also pays a dividend yield of 2.9%, which is rare for a semiconductor stock and more than doubles the industry average.
Europe - Koza Altin Izletmeleri
In the Europe region, the stock that ranks at the top of the GuruFocus Magic Formula list based on the above is Koza Altin Izletmeleri AS (IST:KOZAL, Financial), a Turkish gold mining company with more than 200 exploration licenses throughout Turkey, the Aegean and Marmara regions, the Black Sea and Anatolia.
Koza Altin Izletmeleri has a business predictability rank of four and a half out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the double-digits in the past.
The company has an earnings yield of 23.91%, which is higher than 95% of industry peers, and a return on capital of 268.74%, which outperforms 98% of competitors.
On Sept. 16, shares of Koza Altin Izletmeleri traded around 98.75 Turkish lira ($11.58) for a market cap of 15.06 billion lira. The GF Value chart rates the stock as modestly undervalued.
Gold is the world’s go-to safe haven asset, which has typically made its price rise in times of economic uncertainty. However, while many investors do use gold as a hedge against things like inflation and currency valuation changes, there is another factor driving the growth in demand for gold, and that is the usefulness of the metal in various technology fields. From internet expansion to rapid diagnostic tests, solar cells and the breakdown of groundwater contaminants, the use of gold is on the rise in many fields, which should help gold miners post higher profits.
Canada - West Fraser Timber
In Canada, the stock that ranks at the top of the GuruFocus Magic Formula list based on the criteria is West Fraser Timber Co. Ltd. (TSX:WFG, Financial), a Canadian forestry company that produces lumber, engineered wood products, newsprint and wood chips.
West Fraser Timber has a business predictability rank of three out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the high single digits in the past.
The company has an earnings yield of 53.48%, which is higher than 97% of industry peers, and a return on capital of 122.41%, which also outperforms 97% of competitors.
On Sept. 16, shares of West Fraser Timber traded around 98.77 Canadian dollars ($77.92) for a market cap of C$10.71 billion. The GF Value chart rates the stock as fairly valued.
Like Boise Cascade, West Fraser Timber is also benefiting from an increase in housing and commercial construction demand, both on its home turf and around the world. The largest lumber producer in North America, the company operates dozens of mill locations in Canada, the U.S. and Western Europe, giving it significant scale and cost control advantages.
U.K./Ireland – RELX
In the U.K./Ireland region, the stock that ranks at the top of the GuruFocus Magic Formula list based on the criteria is RELX PLC (LSE:REL, Financial), a U.K.-based company that provides information, analytics and decision-making tools for professional and business customers.
RELX has a business predictability rank of four and a half out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the double-digit range in the past.
The company has an earnings yield of 3.73%, which is higher than 60% of industry peers, and a return on capital of 475.57%, which outperforms 95% of competitors.
On Sept. 16, shares of RELX traded around 21.66 British pounds ($29.87) for a market cap of 41.90 billion pounds. The GF Value chart rates the stock as modestly overvalued.
RELX is in the business of helping other businesses. It operates through four segments: Risk, which combines industry knowledge with technology to evaluate risks and enhance operational efficiency; Scientific, Technical & Medical, which helps researchers with critical thinking and decision-making skills; Legal, which provides legal, regulatory and business information and analytics to improve outcomes; and Exhibitions, which helps businesses connect with each other, learn about markets, source products and complete transactions.
Oceania – Fortescue Metals Group
In the Oceania region, the stock that ranks at the top of the GuruFocus Magic Formula list based on the criteria is Fortescue Metals Group Ltd. (ASX:FMG, Financial), an Australian iron ore miner and infrastructure company.
Fortescue has a business predictability rank of three out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the high single-digit range in the past.
The company has an earnings yield of 38.02%, which is higher than 97% of industry peers, and a return on capital of 78.5%, which also outperforms 97% of competitors.
On Sept. 16, shares of Fortescue traded around 17.25 Australian dollars ($12.58) for a market cap of AU$54.84 billion. The GF Value chart rates the stock as significantly undervalued.
Fortescue has a history of generating solid profits and growth, even though it operates in a highly cyclical industry. The stock price can often track iron ore spot prices, but in the long term, it has grown alongside the company, which is encouraging for investors looking for a miner that can grow meaningfully regardless of where it is in the market cycle.
Latin America – Ternium Argentina
In the Latin America region, the stock that ranks at the top of the GuruFocus Magic Formula list based on the criteria is Ternium Argentina SA (BUE:TXAR, Financial), an Argentina-based steel supplier for housing and infrastructure works throughout the Americas.
Ternium has a business predictability rank of three out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the high single-digit range in the past.
The company has an earnings yield of 22.93%, which is higher than 86% of industry peers, and a return on capital of 90.18%, which also outperforms 96% of competitors.
On Sept. 16, shares of Ternium traded around 100 Argentine pesos ($1.02) for a market cap of 451.71 billion pesos. The GF Value chart rates the stock as significantly overvalued.
With 17 production facilities raging from the U.S. to Brazil and several countries in between, Ternium is one of the largest steel producers in the Americas. The company is dedicated to remaining on the cutting edge of industry technology in order to improve the efficiency and sustainability of its operations. The steel industry is also expected to benefit from an influx of major infrastructure projects in its key markets.
Africa – El Sewedy Electric
In the Africa region, the stock that ranks at the top of the GuruFocus Magic Formula list based on the criteria is El Sewedy Electric Co. (CAI:SWDY.CA, Financial), an Egyptian multinational electric company that develops, manufactures and sells integrated energy products and services.
El Sewedy has a business predictability rank of three out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the high single-digit range in the past.
The company has an earnings yield of 25.78%, which is higher than 95% of industry peers, and a return on capital of 40.80%, which also outperforms 86% of competitors.
On Sept. 16, shares of El Sewedy traded around 8.81 Egyptian pounds (56 cents) for a market cap of 19.12 billion pounds. The GF Value chart rates the stock as modestly overvalued.
El Sewedy is well-positioned to benefit from economic growth and the expansion of energy infrastructure in its target markets. The company got its start 80 years ago as an electrical components manufacturer, but has since grown to provide energy, digital and infrastructure solutions on a global scale. El Sewedy focuses on long-term sustainability in its projects, establishing green energy and smart metering projects across Africa, the Middle East and Eastern Europe.
India – Sun TV Network
In India, the stock that ranks at the top of the GuruFocus Magic Formula list based on the criteria is Sun TV Network Ltd. (BOM:532733, Financial), an Indian mass media company that owns a variety of TV channels and radio stations focused on news and entertainment.
Sun TV has a business predictability rank of four and a half out of five stars, which means the company’s results are fairly predictable and have granted investors an average annual return in the double-digit range in the past.
The company has an earnings yield of 12.65%, which is higher than 84% of industry peers, and a return on capital of 123.79%, which also outperforms 87% of competitors.
On Sept. 16, shares of Sun TV traded around 508 Indian rupees ($6.90) for a market cap of 200.19 billion rupees. The GF Value chart rates the stock as fairly valued.
Sun TV is among the most successful and highly rated TV channel operators in India, and its strong profitability can be seen in its operating margin, which has rarely dropped below 50% over the past decade. Its channels offer programs in four major Indian languages, allowing them to reach a broader audience and increase their growth potential.
