We recently published a list of 10 Best Magic Formula Stocks for 2025. In this article, we are going to take a look at where Meta Platforms, Inc. (NASDAQ:META) stands against other 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.
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).
A team of developers working in unison to create the company’s messaging application.
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.
Overall, META ranks 7th on our list of best magic formula stocks for 2025. While we acknowledge the potential of META, 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 META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
