In this article, we will take a look at the 10 Best Magic Formula Stocks for 2025.
The Magic Formula, as defined by Joel Greenblatt in his book The Little Book that Beats the Market, entails evaluating companies based on two metrics: earnings yield (EBIT/enterprise value) and return on capital. Greenblatt is one of the few fund managers who have regularly achieved double-digit percentage returns during their careers on Wall Street. His former business, Gotham Capital, had an incredible run from 1985 until 1994. During this time, the fund generated a net return of 34%. That said, even he was conscious that this method seemed too wonderful and easy to be true, which is why, throughout his book, he frequently questions the reader: what is the assurance, if any, that this investment technique genuinely works and is not just a fluke? In any case, he frequently underlines that the Magic Formula investment technique does not encourage investing in firms with average or low return on capital since the strategy creates a rating system to identify top companies with the best return on capital and earnings yield.
However, like with any method, there is some risk involved, and the Magic Formula does not ensure success. Since the strategy is based on past data, it’d be difficult to say if it could work well in the future, especially if market conditions change. Incidentally, a backtest of market performance from 2003 to 2015 found that the Magic Formula approach produced annualized returns of 11.4%, while the S&P 500 produced returns of 8.7%, thus failing to live up to Greenblatt’s inflated claims despite beating the benchmark. Greenblatt himself admits that the Magic Formula fails in many cases and performs poorly in some others, particularly when the holding time is too short. The investor stated the following:
“Most people just won’t wait that long. Their investment time horizon is too short. If a strategy works in the long run (meaning it sometimes takes three, four, or even five years to show its stuff), most people won’t stick with it. After a year or two of performing worse than the market averages (or earning lower returns than their friends), most people look for a new strategy— usually one that has done well over the past few years. Even professional money managers who believe their strategy will work over the long term have a hard time sticking with it.”
More recently, however, Joel Greenblatt’s fund appears to have lagged behind the overall market as a result of his investment strategy. As of the end of January, the Gotham Large Value Fund (GVALX) has only returned 10.86% over the last five years, while the S&P 500 has returned 15.17%. Nonetheless, the Magic Formula is one of many investment strategies that investors can opt for as they navigate the stock market.
Joel Greenblatt of Gotham Asset Management
Our Methodology
To make our list of the best Magic Formula stocks, we ranked the stocks in Gotham Asset Management’s Q4 2024 SEC filings by their stake value and picked out the most valuable holdings.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
10. Berkshire Hathaway Inc. (NYSE:BRK-A)
Number of Hedge Fund Holders: 131
Gotham Asset Management’s Q4 2024 Stake: $35.7 million
Berkshire Hathaway Inc. (NYSE:BRK-A) is a diversified global conglomerate holding corporation focused mostly on the insurance industry. It invests cash earned by insurance activities in a diverse range of subsidiaries, stock holdings, and securities from numerous sectors.
On January 24, UBS analyst Brian Meredith raised Berkshire Hathaway’s price target to $803,444 from $796,021, while keeping a Buy rating on the stock. The change comes as UBS integrates the anticipated impact of the Los Angeles flames into its predictions. Berkshire Hathaway’s reinsurance branch is expected to suffer an insured loss of $1 billion, while the impact on its basic insurance operations is expected to be less significant at $150 million. Meredith’s forecast for Berkshire Hathaway Inc. (NYSE:BRK-A) includes a modest increase in the 2026 earnings per share projection.
Berkshire Hathaway Inc. (NYSE:BRK-A) reported a significant increase in Q4 2024 earnings, owing mostly to its insurance firms, while cash holdings hit a record high. The company’s operational profit climbed by 71% to $14.53 billion during the quarter. This growth was fueled by a 302% rise in insurance underwriting profits, which reached $3.41 billion, and a roughly 50% increase in insurance investment income, which totaled $4.09 billion.
9. Merck & Co., Inc. (NYSE:MRK)
Number of Hedge Fund Holders: 91
Gotham Asset Management’s Q4 2024 Stake: $42.28 million
Merck & Co., Inc. (NYSE:MRK) is a prominent American multinational pharmaceutical corporation that is historically tied to the original Merck Group. Internationally known as Merck Sharp & Dohme (MSD), the company provides prescription pharmaceuticals, vaccines, biologic treatments, and animal health products.
Additionally, Merck & Co., Inc. (NYSE:MRK) started a significant Phase 3 clinical trial for Zilovertamab Vedotin in late 2024, an investigational drug designed to treat patients with diffuse large B-cell lymphoma. This stage comes after positive Phase 2 trial findings and aims to demonstrate the benefits of the new combination regimen.
On February 10, Bernstein SocGen Group reduced its price target for Merck & Co., Inc. (NYSE:MRK) shares to $95 from $110, while maintaining a Market Perform rating. Analyst Courtney Breen mentioned concerns about Gardasil, Merck’s vaccine, which is nearing the end of its exclusivity period (LOE), as a crucial component in the adjustment. Despite Merck’s Q4 profitability, lingering Gardasil worries have harmed the stock’s performance. Breen acknowledges that the lower end of the Gardasil sales prediction has been de-risked, with $200 million in sales from China now realized, and that this move has been included in Bernstein SocGen’s base case scenario.
GreensKeeper Asset Management stated the following regarding Merck & Co., Inc. (NYSE:MRK) in its Q3 2024 investor letter:
“Merck & Co., Inc. (NYSE:MRK) was our second-largest detractor this quarter, declining -8.3%. MRK’s leading HPV vaccine, GARDASIL 9, faced challenges internationally due to inventory buildup within its Chinese distributor, which is expected to reduce shipments for the remainder of 2024. Despite this short-term impact, the long-term outlook for GARDASIL 9 remains promising. Meanwhile, the company’s $27 billion Keytruda cancer juggernaut continues to grow at a healthy clip, powering earnings growth.”
8. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Holders: 161
Gotham Asset Management’s Q4 2024 Stake: $49.9 million
Broadcom Inc. (NASDAQ:AVGO), one of the world’s leading technological companies, has a significant presence in both hardware and software. The company’s key competence is in offering networking and custom chips for a wide range of applications.
Broadcom Inc. (NASDAQ:AVGO) reported $14.05 billion in revenue for the fourth quarter of 2024, representing a 51% year-over-year gain. AI sales increased 220% from the previous year to $12.2 billion, while semiconductor revenue reached a new high of $30.1 billion. The company’s cutting-edge AI XPUs and Ethernet networking solutions were considered the primary drivers of this growth.
Citi maintained a Buy rating and $220 price target on Broadcom Inc. (NASDAQ:AVGO) on January 13, despite anticipated regulatory headwinds. The firm expressed worry over recent allegations that there might be more limitations on AI chip shipments to China. Notably, Bytedance, AVGO’s third-largest ASIC client, may be harmed by these limits, possibly affecting $2-$3 billion in fiscal year 2025 sales, or 3%-5% of the company’s estimated sales for the year. Nonetheless, even with uncertainties centered on government policy, Citi remains optimistic about Broadcom’s prospects. While the firm recognizes the difficulty of anticipating government initiatives, it believes that overall growth in the AI sector would more than make up for any potential loss of sales to Bytedance.
Aristotle Atlantic Partners, LLC made the following comment about AVGO in its Q4 2024 investor letter:
Broadcom Inc. (NASDAQ:AVGO) contributed to performance in the fourth quarter as the company’s third quarter results demonstrated continuing strength for its AI networking and custom accelerator semiconductor business. The company also gave long-term guidance for the service addressable market (SAM) opportunity for its AI-related business, indicating a market opportunity of $60 billion to $90 billion, which only includes contributions from its current three customers. This long-term outlook for AI semiconductor content exceeded investor expectations. Broadcom’s quarterly results also showed the company is ahead on its VMware integration timeline to achieve $8.5 billion in EBITDA, which will support long-term gross and operating margin expansion for the company.
7. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 262
Gotham Asset Management’s Q4 2024 Stake: $52.4 million
Meta Platforms, Inc. (NASDAQ:META) is a prominent technology company that is most recognized for its flagship platforms, Facebook, Instagram, and WhatsApp, in addition to its innovative developments in augmented reality (AR) and virtual reality (VR).
Earlier in January, Meta’s founder Mark Zuckerberg expressed interests in investing up to $65 billion in artificial intelligence, referring to 2025 as “a defining year for AI.” Following this attitude, a company note issued on February 14 showed that Meta Platforms Inc. (NASDAQ:META) is already extensively invested in AI-powered humanoid robots. This project will be managed by a new team from Meta’s Reality Labs hardware division.
The tech giant’s Q4 sales increased by 21% year-over-year to $48.39 billion, while full-year revenue increased by 22% to $164.50 billion. The company’s breakthroughs in artificial intelligence and digital advertising have contributed significantly to its success. In addition, Meta is reportedly in discussions to purchase South Korean AI firm FuriosaAI.
6. Snowflake Inc. (NYSE:SNOW)
Number of Hedge Fund Holders: 85
Gotham Asset Management’s Q4 2024 Stake: $68.9 million
Snowflake Inc. (NYSE:SNOW) is an American cloud-based data storage company that runs a platform which enables data analysis and simultaneous access to large sets with low latency. Its platform is based on Amazon Web Services, Microsoft Azure, and the Google Cloud Platform. It provides Snowflake Cortex with a set of AI capabilities that leverage massive language models to interpret unstructured data.
KeyBanc Capital maintained its Overweight rating on Snowflake Inc. (NYSE:SNOW) shares on February 12, with a stable price target of $210. The endorsement follows a detailed quarterly study of 16 Snowflake customers and partners, which revealed information on their purchasing habits and product engagement. KeyBanc analysts also noticed an increasing interest in Cortex, Snowflake’s data and machine learning platform, which is projected to make a substantial contribution over the medium term. This confidence is bolstered by Snowflake’s notable 30% year-over-year sales increase and 67% gross profit margin.
5. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Holders: 234
Gotham Asset Management’s Q4 2024 Stake: $74.67 million
Alphabet Inc. (NASDAQ:GOOGL) is a global technology giant known for its diverse products, including Google Cloud and Google Services, which dominate a number of market segments. Recently, Alphabet and Taiwan’s HTC agreed to invest $250 million to strengthen their position in XR (extended reality) technology. This comes after Google released the Android XR platform back in December, which was created in collaboration with Qualcomm and Samsung Electronics.
Needham analyst Laura Martin retained a Buy rating and a price target of $225 on GOOGL shares on February 5. Martin cited the company’s impressive 12% year-over-year revenue growth in Q4 2024, which was primarily driven by strong performance in Google Search and Cloud. The company’s cloud division also saw a 30% increase in revenue due to strong demand for AI-powered solutions and strategic deals worth over $1 billion.
Oakmark Funds stated the following about Alphabet Inc. (NASDAQ:GOOGL) in its Q4 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOGL) was the top contributor during the quarter. Despite ongoing litigation with the Department of Justice in its antitrust case, the U.S.-headquartered interactive media and services company’s stock price rose after posting solid third-quarter earnings. In the Search division, the company generated low-teens year-over-year revenue growth and management highlighted that they’re seeing strong user engagement with their new AI Overviews feature. The biggest upside surprise came from the Cloud division, where revenue growth accelerated to 35% and margins reached a record of 17%. This performance was driven by client demand for AI Infrastructure and Generative AI Solutions as well as core Google Cloud Platform (GCP) products. We continue to believe Alphabet is a collection of great businesses that can unlock further value over the long term through its world-class AI capabilities.”
4. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 339
Gotham Asset Management’s Q4 2024 Stake: $76.7 million
Amazon.com, Inc. (NASDAQ:AMZN) is a major technology corporation that operates the world’s largest e-commerce and cloud computing companies. The firm also provides digital streaming and artificial intelligence technologies. Amazon.com, Inc.’s (NASDAQ:AMZN) e-commerce position gives it a considerable competitive edge over competitors, as it accounts for roughly 38% of all e-commerce sales in the US.
On February 16, TD Cowen analyst John Blackledge maintained his Buy rating on the company’s shares and set a price objective of $265. One of the grounds for Blackledge’s sentiments is AWS’s projected increase in generative AI income. The analyst stated that he expects growth from $2.8 billion in 2024 to $56.3 billion by 2030. Blackledge also praised Anthropic’s contribution to AWS’s GenAI income stream, which is expected to account for half of AWS’s GenAI revenue by 2024. He also stated that, depending on various scenarios, AWS’s GenAI income from Anthropic may range from $7 billion to $17 billion by 2027.
Ariel Appreciation Fund stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q4 2024 investor letter:
“During the quarter, we initiated three new investments, each in companies we have followed closely for a considerable time. At various points, we viewed them as missed opportunities; however, our experience with Mr. Market has taught us that patience often creates inevitable entry points. This quarter, some exciting opportunities presented themselves. The three investments are Amazon.com, Inc. (NASDAQ:AMZN), Diageo (NYSE: DEO), and Uber (NASDAQ: UBER). We will discuss each in detail below.
Amazon is one of the most widely followed companies in the world. While the “Magnificent 7” (of which Amazon is a key member) is often seen as a runaway freight train, we were able to purchase Amazon shares at prices last seen in 2021—three years ago. How is this possible if the “Mag7″ has been so dominant? We believe it largely reflects the increasing prevalence of narratives driving market sentiment…” (Click here to read the full text)
3. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 317
Gotham Asset Management’s Q4 2024 Stake: $95.28 million
Microsoft Corporation (NASDAQ:MSFT) is a global technology powerhouse best known for its flagship software products, which include the Windows operating system, Microsoft 365 suite, and Edge browser. In addition, the company provides video games, gaming hardware, and cloud services, which account for the most revenue generated.
Moreover, on February 11, Microsoft Corporation (NASDAQ:MSFT) announced an extended agreement with Anduril, an American defense technology company, to launch the next phase of the United States Army’s Integrated Visual Augmentation System (IVAS) program.
On January 6, Citi kept its buy rating on MSFT shares with a target price of $497. The company’s announcement that it intends to invest over $80 billion in capital expenditures for AI data centers in fiscal 2025 was important, despite a large portion of the American AI opportunity already being at a high level. Citi claims that the $80 billion covers almost all of Microsoft’s data center expenses for the fiscal year 2025.
2. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 166
Gotham Asset Management’s Q4 2024 Stake: $155.46 million
Apple Inc. (NASDAQ:AAPL) is a global technology firm best known for its main products, the iPhone, Mac, and Apple Watch, as well as its vast suite of services, which includes Apple Music and iCloud. The company has also made strides in the AI sector by introducing its intelligence system, Apple Intelligence.
On February 4, JPMorgan reiterated its Overweight rating and $270 price target for Apple Inc. (NASDAQ:AAPL), citing Sensor Data data that showed Apple’s App Store sales increased by 2.7% month-over-month in January, exceeding the historical average growth rate of 2.3% from December to January.
In the first quarter of 2025, the tech giant reported quarterly revenues of $124.3 billion, up 4% year on year, and quarterly diluted profits per share of $2.40, up 10% year-over-year. Apple CEO Tim Cook described this as the company’s “best quarter ever.”
In its third quarter 2024 investor letter, Madison Investments said the following regarding Apple Inc. (NASDAQ:AAPL):
“Alphabet Inc., Eli Lilly and Company, Qualcomm Incorporated, Microsoft Corporation, and Apple Inc. (NASDAQ:AAPL) were the largest detractors. Apple has been volatile in the last quarter but ended on strength. Early in the quarter, Apple benefited from the introduction of their AI strategy, Apple Intelligence. They followed in September with the new iPhone 16, which also created some excitement. We are underweight to Apple, which has resulted in a headwind for performance.”
1. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 223
Gotham Asset Management’s Q4 2024 Stake: $270.59 million
NVIDIA Corporation (NASDAQ:NVDA) is a global leader in AI, GPUs, and high-performance computing. Although increased competition from rising companies such as DeepSeek might appear worrisome, the Wall Street superstar maintains its dominance in the AI hardware industry, aided by its extensive software ecosystem.
On February 25, Evercore ISI analyst Mark Lipacis maintained a Buy rating on NVIDIA Corporation (NASDAQ:NVDA), with a $190 price target. Even though the stock has lagged the overall market, it is still deemed inexpensive. It is trading at a lower price-to-earnings ratio than its historical average, providing an appealing entry opportunity for investors ahead of the company’s earnings release.
Manole Capital Management stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q3 2024 investor letter:
“As of this publication, Nvidia is up roughly 150% year-to-date. NVIDIA Corporation (NASDAQ:NVDA) was the largest gainer in the S&P 500 last year and has more than tripled in value over the last year. It hit an eye-opening market capitalization of $3 trillion in June, less than four months after it eclipsed the $2 trillion mark. Enthusiasm for everything AI-related, especially for the primary chip maker whose products are essential to powering AI technology, continues to fuel the market. Last quarter, and for the fifth consecutive quarter, Nvidia reported sales and profits that blew past Wall Street expectations. The stock rose +37% in the second quarter alone.”
While we acknowledge the potential of NVDA, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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