Joel Greenblatt’s Portfolio and Recent Buys

In this article, we discussed the legendary value investor Joel Greenblatt’s portfolio and recent buys.

Joel Greenblatt is an American investor and hedge fund manager who heads New York-based Gotham Asset Management. The legendary value investor who is famous for his “Magic Formula” investing debuted on Wall Street working for an investment firm that invests primarily in merger arbitrage. However, Greenblatt later realized that the rate of risk is significantly higher in the merger arbitrage strategy compared to the potential profit-making opportunities. He believed risking $10 to earn a dollar isn’t a wise strategy. Greenblatt then  started finding investment opportunities that offer a higher reward with lower risk:

He is also a longtime teacher at Columbia Business School and author of several investing books. His top-selling books include “The Little Book That Beats the Market”. In this book, the author broadly described his Magic Formula that investors can use to generate robust returns. The formula is based on two main factors: return on capital and earnings yield. His latest book is Common Sense: The Investors’ Guide to Equality, Opportunity, and Growth.

Joel Greenblatt’s Magic Formula, Investing Strategy and Top Picks

The founder of Gotham Management Joel Greenblatt has been moving away from his earlier strategy of making a concentrated portfolio, which helped Gotham Management to generate an average 50% return year over year in the first ten years since inception. He now likes to hold a position in hundreds of long and short stocks at a time and seeks to generate profits from short-term price movements. The time held for his top 10 holdings averages around 1.95 quarters while the top ten holdings accounting for 12.77% at the end of the fourth quarter. Despite the change in portfolio management strategy, the legendary investor continues to generate strong returns for investors. Greenblatt seeks to find stocks with attractive valuations and strong fundamentals. He initiates long positions in stocks that he believes are undervalued and creates short positions in stocks that are overvalued in his view.

Joel Greenblatt of Gotham Asset Management

At the end of the fourth quarter of 2020, his hedge fund Gotham Management held positions in 985 stocks with a market value of just over $3 billion. The firm initiated positions in 136 stocks and added to its 230 existing positions. Gotham Management has also sold out 162 stocks and reduced its positions in 607 stocks. The firm has spread investments across several sectors including information technology, consumer discretionary, healthcare, and industrial, and a few others.

He has also established several funds including long-only and long/short. His Gotham Large Value Fund (GVALX) has generated a cumulative return of 89% since inception while cumulative returns from Gotham Total Return Fund (GTRFX) stood around 32% since inception. Other funds include Gotham Index Plus (GINDX) and Gotham Enhanced S&P 500 Index Fund (GSPFX).

While Joel Greenblatt’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole. The industry’s has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Let’s start reviewing Joel Greenblatt’s portfolio and recent Buys to find out whether the legendary value investor is in a position to beat the market 2021.

10. eBay Inc (NASDAQ: EBAY)

Gotham Management held 399,384 shares of online platform eBay Inc (NASDAQ: EBAY) at the end of the fourth quarter, according to the latest filings. Joel Greenblatt’s strategy of holding a stake in eBay helped his hedge fund to generate robust returns for investors in 2020. Shares of eBay rallied 61% in the last twelve months and continue to outperform the broader market index in 2021.

In a Q4 investor letter, Steel City Capital highlighted a few stocks including eBay. Here’s what Steel City Capital stated:

“eBay (Long): EBAY continues to be a core holding in the Partnership’s long book despite not having any “sexy” attributes or unknown catalysts. I like EBAY because it checks the boxes of being both capital light and priced as a value stock (low multiple of free cash flow), factors which are attractive in a potentially inflationary environment.

In 3Q’20 the company printed $2.6 billion of revenue vs. guidance of $2.4 billion (a $200 million beat) while full year revenue guidance was taken up by $400 million, implying 4Q’20 would be higher by $200 million as well. Free cash flow from continuing ops was guided to $2.3 billion for the full year, slightly above the $2.0 billion the business regularly generated before getting a Covid/stimulus related boost.”

9. Berkshire Hathaway Inc. (NYSE: BRK.B)

The legendary value investor slashed 13% of his position in Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK.B) during the fourth quarter. Despite that, BRK.B is the ninth-largest stock holding of Joel Greenblatt’s portfolio. Shares of Berkshire grew 12% since the beginning of this year, enlarging twelve months gains to 34%.

In the Q2 investor letter, Nomadic Value Investment Partners highlighted the confidence in Berkshire Hathaway. Here is what Nomadic Value Investment Partners stated:

“We added to Berkshire Hathaway. I won’t spend too much talking about this, but BRK is as attractively priced as it’s been in some time. The press’s and FinTwit’s fascination with “Warren’s lost it” is at a cyclical peak and is complete noise. However, the valid bear argument is that BRK is too big to compound at good rates going forward, and subsidiary company performance will be weak for the next couple of years with its high exposure to air traffic (Precision Cast Parts and previously held airline stocks) and holdings in “old economy” manufacturing and retail businesses. Also, short-term there’s an unknown consequence of insurance claim payouts and/or refunds13 . We wouldn’t completely disagree with these judgments, and the optics are certainly bad when BRK doesn’t buy back shares in a quarter with a substantial sell-down. However, with a long-term lens and given the management style of BRK (conservative talk and overperform), we will likely be quite satisfied in the future – whatever that looks like. Meanwhile, we’ve gotten into a range where 30%-50% of BRK is free. Are the actual growth prospects for Berkshire this dire? Berkshire is our largest position.”

8. Howmet Aerospace Inc. (NYSE: HWM)

Howmet Aerospace Inc. (NYSE: HWM) is the eighth-largest stock holding of Joel Greenblatt’s portfolio at the end of the fourth quarter. Despite a massive selloff early in 2020, shares of Howmet Aerospace recovered robustly in the past two quarters. Howmet Aerospace stock price is up 10% so far in 2021. HWM was in 35 hedge funds’ portfolios at the end of September. However, in the fourth quarter, 49 hedge funds held stakes in the company. This shows a significant increase in the positive hedge fund sentiment for the company.

7. Walmart Inc. (NYSE: WMT)

Joel Greenblatt reduced his stake in Walmart Inc. (NYSE: WMT) by 13% in the latest quarter to 0.78% of the overall portfolio. Despite that, Walmart is the seventh-largest stock holding of Joel Greenblatt’s portfolio. After a strong rally in 2020, shares of Walmart are underperforming since the beginning of this year. The selloff is blamed on investors’ shift towards value stocks from growth stocks. On the positive side, the company offers hefty dividends to investors. Its dividend yield is currently standing around just over 1.6%.

The company is reportedly exploring to take Flipkart public through a special purpose acquisitions company, or SPAC. Flipkart is eyeing a valuation of around $35 billion in a blank-check transaction.

Walmart shares are up 25% over the last 12 months.

6. Oracle Corporation (NYSE: ORCL)

The legendary value investor has been holding a stake in Oracle Corporation (NYSE: ORCL) over the last several years. However, he  reduced his position in Oracle by 17% during the fourth quarter. Despite that, his hedge fund held 399,127 shares of the software company, according to the latest filings. Shares of Oracle grew 50% in the last twelve months.

Polen Capital Management, a value-driven, concentrated, long-term investment management firm, highlighted a few stocks including Oracle Corporation in a Q4 investor letter. Here’s what Polen Capital Management said:

“During the quarter, we sold Oracle. We have been extremely patient with Oracle’s transition to the cloud. But, after years of little to no revenue growth and insufficient evidence, in our view, that the transition is working, we have decided to liquidate our position in the company. In 2013, Oracle began a slow and methodical transition of its on-premise relational database offering to the cloud. This evolution eventually culminated in the Autonomous Database, or “ADB.” In theory, this product should be extremely successful, as its value proposition is strong. ADB effectively cuts humans out of managing, maintaining, and patching databases, and Oracle guarantees 99.995% reliability. Yet, after over two years of existence, ADB growth and adoption is not where we hoped it would be. The database business represents over 50% of Oracle’s revenue. Despite strong growth in Oracle’s Cloud ERP businesses, ADB’s success is material to our long-term investment case for Oracle. We will continue to follow the company closely but watch from the sidelines until there is more widespread adoption of this cloud offering.”

5. Facebook, Inc. (NASDAQ: FB)

After a stunning rally in 2020, shares of Facebook (NASDAQ: FB) are struggling to trade in the green this year. The legendary value investor sold 5% of his position during the fourth quarter to capitalize on robust share price appreciation in the pandemic year. Facebook ranks 5th on the list of Joel Greenblatt’s top picks.

Kinsman Oak Capital Partners Inc., an independent Toronto-based boutique investment firm, highlighted a few stocks including Facebook in an investor letter. Here’s what Kinsman Oak Capital Partners stated:

“Our view on Facebook (FB) may be somewhat controversial. The bear case for FB boils down to antitrust risk and valuation. Facebook, although to a lesser degree, is a relative value bargain as well. We believe the company possesses an element of platform risk that Alphabet does not but, compared to the rest of the market, the stock still seems undervalued. We compared Facebook to the Russell 2000, an index full of cyclical businesses that are considered no-brainers at the beginning of a recovery and popular re-opening stocks that are poised to go higher after the vaccine is distributed (Appendix E). Facebook is significantly cheaper, growing faster, has a larger economic moat, superior margin profile, and requires less capex. In short, we believe the obfuscated earnings power makes Facebook appear more expensive than it really is.”

4. Alphabet Inc (NASDAQ: GOOGL)

Google parent Alphabet (NASDAQ: GOOGL) is the permanent member of Joel Greenblatt’s portfolio over the past couple of years. His hedge fund held 26,910 shares of Alphabet at the end of the latest quarter, down 5% from the previous quarter. Alphabet stock price jumped 19% year to date, extending the twelve-month gains to 73%.

Bretton Fund, which returned 11.52% for the fourth quarter, highlighted a few stocks including Alphabet in the fourth quarter investor letter. Here is what Bretton Fund stated:

“Google (aka Alphabet) was one of our best performing stocks last year, returning 30.9%, while its earnings per share increased 19%. As lockdowns first went into place in the spring, many advertisers hit pause on their campaigns, waiting—like a lot of us—to see what the world would look like. And then—like a lot of us—advertisers adjusted. Travel companies cut back their campaigns, while ads for other goods, like athleisure wear and video games, picked up the slack. Google had a rough second quarter, but was back in the swing of things by the next quarter.”

3. Microsoft Corporation (NASDAQ: MSFT)

The technology giant Microsoft Corporation (NASDAQ: MSFT) has generated robust returns for shareholders in 2020 in the form of dividends and share price appreciation. It is the third-largest stock holding of Joel Greenblatt’s portfolio. Moreover, shares of MSFT accelerated the upside momentum into 2021, thanks to expectations for double-digit revenue growth trends. MSFT is up 74% over the last 12 months.

Bretton Fund, which returned 11.52% for the fourth quarter, highlighted a few stocks including Microsoft in an investor letter. Here is what Bretton Fund stated:

“Microsoft’s stock also had a great year, returning 42.4% on increased earnings per share of 30%. The main driver of their growth in recent years is their cloud computing business, and while it did see a bump in demand as office workers went remote, most of the growth is from the continued shift of corporate computing systems to “the cloud.” We think this shift is still in its early stages.”

2. Amazon.com (NASDAQ: AMZN)

Amazon.com (NASDAQ: AMZN) is the second-largest stock holding of Joel Greenblatt, as of the end of the fourth quarter. The firm held 17,381 shares of Amazon, down 8% from the previous quarter. Amazon stock price is also trading in the red this year despite strong growth in the pandemic year.

Mairs & Power, which returned 13.88% for the fourth quarter of 2020, highlighted a few stocks including Amazon in the Q4 investor letter. Here is what Mairs & Power said:

“We did acquire AMZN in the fourth quarter. But not owning it till then cost the Fund in performance relative to the S&P 500 TR Index. We had held off taking a position in Amazon largely due to concerns about the company’s slim margins. But in 2020, we saw its core margins nearly double as more consumers shopped online, which in turn led to greater utilization and route density within Amazon’s delivery network. In addition, Amazon’s advertising business, which represents a small portion of its overall sales, has been growing quickly. Advertising could become a third leg of growth for the company along with e-commerce and Amazon Web Services. In short, Amazon checks all of our boxes — it has a strong management team, great growth prospects, and a strong competitive advantage. And last year, we initiated our position at an intriguing valuation.”

1. Apple Inc (NASDAQ: AAPL)

The world’s largest tech giant Apple Inc (NASDAQ: AAPL) stock price plunged 8% so far in 2021 amid investors’ shift towards value stocks that are benefitting from the economic recovery and strong growth in yields. It is the top stock pick of Joel Greenblatt’s Portfolio, according to the latest filings.

In a Q4 investor letter, Saturna Capital Corporation, an investment management firm, presented a bullish outlook for Apple. Here is what Saturna Capital Corporation stated:

“Leading the pack, Apple claimed the top spot among Fund contributors. More than once we have read Apple obituaries, but we believe the company’s combination of hardware and services will continue to drive the business for years to come, and we look forward to improved availability for the iPhone 12.”

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