Investors like a good deal. The problem is, most of us wouldn’t know a bargain if it hit us in the face.
At least that’s what hedge fund manager and value investing icon Joel Greenblatt says. In a series of books and lectures Greenblatt has touted his “magic formula” for stock picking. Greenblatt argues that by following the simple formula we can take the guess work out of picking bargain stocks.
So what is the magic formula?
I’m glad you asked. Simply put it’s the best ranked stocks with a low earnings yield and a high return on capital. By using these two rankings, the formula seeks to find cheap stocks with underlying businesses that are performing well. And while that sounds overly simple, following this simple formula would’ve helped you trounce the market over many years.
I’ve looked through the best ranked stocks according to Greenblatt’s formula, and these four stocks are amongst the most compelling today.
Drug Store dollars
There was a time when CVS Caremark Corporation (NYSE:CVS) was just a “drug store.” But since the 2007 purchase of CVS Caremark Corporation (NYSE:CVS), and introduction of the new CVS Caremark Corporation (NYSE:CVS), this has been a different company. The combination of these two successful businesses has brought out the best in both of them.
With the addition of Caremark, CVS Caremark Corporation (NYSE:CVS) added a dominant market leader in the pharmacy benefit management and mail order game. This has saved the company money on inventory as pharmacy services and suppliers have been streamlined. In addition, CVS Caremark Corporation (NYSE:CVS) has been spared from the “retailer-PBM” vendor drama and costly negotiations that have hurt Walgreen Company (NYSE:WAG)’s earnings in recent years, due to their relationship with Medco.
All this synergy has lead to some strong magic formula numbers; CVS Caremark Corporation (NYSE:CVS) has an earnings yield of 5.56% and ROC of 7.54%. The companies earnings increased 10%, and the dividend has increased a whopping 23% since the merger.
Who says acquisitions are bad for shareholders?
A dogs life
When it comes to retail stocks, companies that create a unique buyer experience win. PetSmart, Inc. (NASDAQ:PETM), has successfully branded itself as a unique place to purchase pet products and care for pets. The company ranks amongst the 50 best magic formula stocks, regardless of size, with an earnings yield of 5.45% and ROC of 29.74%.
In addition to creating a great experience, PetSmart, Inc. (NASDAQ:PETM) is in a very high growth industry. The pet product industry has nearly doubled since 2001, which makes the business of caring for our furry friends a $55 billion behemoth. The growth has been largely because PetSmart, Inc. (NASDAQ:PETM) has expanded beyond selling pet food and toys, to offering veterinary services, training courses, and more. The growth is just getting started on this one, EPS is expected to increase by nearly $2 per share by 2015.
