Magic Formula Stocks — Greenblatt's High ROCE + High Earnings Yield on NYSE & NASDAQ
Joel Greenblatt's Magic Formula: ROCE above 25% and Earnings Yield above 10% — buying good businesses at cheap prices, systematically.
About This Screen
Joel Greenblatt's Magic Formula ranks every large-cap US stock simultaneously by Return on Capital (business quality) and Earnings Yield (cheapness), then buys those that rank highest on the combined measure. Published in The Little Book That Beats the Market (2005), the methodology showed substantial S&P 500 outperformance over 17 backtested years. The core logic: systematically own good businesses bought at cheap prices.
WHAT THIS SCREEN FINDS: US-listed NYSE and NASDAQ stocks where ROCE exceeds 25% — well above the typical company's 8–15% and a clear signal of competitive advantage — and Earnings Yield exceeds 10%, meaning you pay less than 10× trailing earnings. Both conditions apply simultaneously alongside a minimum $2B market cap and positive P/E.
KEY METRICS EXPLAINED: ROCE (Return on Capital Employed) measures how much operating profit a business generates per dollar of total capital — equity plus debt. A ROCE of 30% means the company earns 30 cents of EBIT on every dollar invested, a high-quality signal that competitors find hard to replicate. Earnings Yield is the inverse of P/E: a 10% earnings yield equals a P/E of 10, making cheapness directly comparable to bond yields.
WHY INVESTORS USE IT: The Magic Formula removes emotional decision-making from the investment process. Greenblatt's backtests showed the dual-rank approach beat the S&P 500 by a wide margin over full market cycles. It specifically targets the intersection of quality and value — avoiding both expensive growth stocks and cheap junk. A systematic, rules-based approach to this combination is exactly what disciplined value investors need.
BENEFITS: Systematic process removes emotional bias. ROCE filter screens out capital-intensive, low-quality businesses. Earnings Yield filter avoids overpaying for earnings. Combined rank captures the best risk-reward within the investable universe. Backtested methodology with real academic and practitioner support spanning decades.
RISKS AND LIMITATIONS: Greenblatt himself found the formula underperforms for stretches of 1–3 years before reverting. Sector context matters significantly — financials and utilities have structurally different capital bases making ROCE not directly comparable. The formula requires holding 20–30 stocks across diverse sectors for at least 3 years. Individual stock selection matters less than disciplined execution.
HOW TO ANALYZE STOCKS FROM THIS SCREEN: Verify ROCE is sustainable (not a one-year spike from asset sales). Check earnings quality by comparing operating cash flow to net income. Review sector context — ROCE of 30% in software is common but 30% in industrials is exceptional. Assess the balance sheet; strong candidates have D/E below 1. Cross-reference with analyst consensus for additional conviction.
COMMON MISTAKES: Ignoring sector context when comparing ROCE figures. Buying single stocks rather than a diversified basket of 20–30 names. Abandoning the system after 1–2 years of underperformance — this is when the formula typically looks worst and performs best subsequently. Overlooking earnings quality issues. Not rebalancing annually as Greenblatt prescribed.
Related screens: Benjamin Graham Value (asset-value validation), Free Cash Flow Champions (earnings quality), GARP Stocks (growth at a reasonable price), Piotroski High Score (financial strength), Winner Stocks (ROCE + growth combination).
Frequently Asked Questions
What is the Magic Formula investing strategy?
Developed by Joel Greenblatt, the Magic Formula ranks all large-cap US stocks by Return on Capital (quality) and Earnings Yield (cheapness), then buys the highest combined-rank stocks. Backtests showed significant S&P 500 outperformance over 17 years. The core logic: buying genuinely good businesses at genuinely cheap prices, applied systematically across a diversified portfolio, produces above-average returns over full market cycles.
What filters does the Magic Formula screen use on StockSifting?
ROCE above 25% (high-quality capital allocation), Earnings Yield above 10% (cheap relative to earnings), Market Cap above $2 billion (institutional-quality size), and positive P/E (profitable company). All four must be met simultaneously. Results are sorted by ROCE descending — highest-quality businesses first.
Why Earnings Yield rather than P/E ratio?
Earnings Yield (Earnings/Price × 100) is the inverse of P/E and makes cheapness directly comparable across assets — a 10% yield means you earn $10 for every $100 invested, equivalent to a P/E of 10. Expressing it as a yield allows direct comparison with bond yields and other asset returns, clarifying whether equities are genuinely cheap on a relative basis.
How many stocks should I hold from the Magic Formula screen?
Greenblatt recommends 20–30 stocks spread across diverse sectors, held for at least 12 months before the first rebalance. Owning fewer than 15 introduces significant stock-specific risk that undermines the systematic benefit. The formula is designed as a portfolio strategy, not a single-stock recommendation system.
How long does the Magic Formula take to produce results?
Greenblatt's research showed the formula underperforms in roughly 1 in 4 years and can lag for stretches of 1–3 consecutive years before reverting strongly. A 3–5 year holding horizon gives the methodology enough time to demonstrate its statistical edge. Abandoning it after a bad year is the most common reason investors fail to capture its long-term returns.
What sectors typically appear on the Magic Formula screen?
Technology, healthcare, consumer staples, and specialized industrials dominate — sectors where capital efficiency is genuinely high and earnings are sustainable. Financial services and utilities are structurally different and ROCE comparisons across these sectors are misleading; the formula is most meaningful within homogeneous peer groups.
How does this screen differ from a simple low P/E screen?
A low P/E screen can catch cheap junk — businesses cheap because they're deteriorating or capital-intensive. The Magic Formula adds the ROCE quality filter specifically to exclude low-quality businesses. You get cheap AND good, not just cheap. This dual filter is what drives the formula's historical outperformance over simple value screens.
Is the Magic Formula screen updated daily?
Yes. StockSifting refreshes all screen data daily after US market close. ROCE and Earnings Yield are calculated from the most recent trailing twelve-month financial data combined with the latest stock price, so the screen reflects current conditions every trading day.
Can I use the Magic Formula for small-cap stocks?
Greenblatt's original research included stocks above $50M market cap. This screen filters above $2B for institutional-quality liquidity. The formula's logic applies at smaller sizes too, but liquidity, higher transaction costs, and more volatile earnings reduce its reliability below $500M market cap.
What is a good ROCE threshold for the Magic Formula?
Greenblatt used varying thresholds in different publications. This screen uses 25% as a strict quality filter, ensuring only genuinely high-quality businesses appear. Companies consistently earning ROCE above 25% year after year almost always have a real competitive advantage — pricing power, switching costs, or network effects that protect returns from competition.
Results 7 stocks matched
Refreshed daily · Sorted by Market Cap (High → Low)
| S.No. | Company | Earnings Yield % | Price | P/E | Mkt Cap | Div Yld % | ROCE % | ROE % | 52W High | 52W Low |
|---|---|---|---|---|---|---|---|---|---|---|
| 1. | Cal-Maine Foods, Inc. | 18.97% | $75.65 | 5.14 | $3.58 B | 6.46% | 55.34% | 26.11% | $126.4 | $71.92 |
| 2. | H&R Block, Inc. | 14.88% | $38.09 | 6.54 | $4.84 B | 4.48% | 42.13% | 336.84% | $58.38 | $28.16 |
| 3. | lululemon athletica inc. | 11.64% | $114.23 | 8.67 | $13.7 B | — | 33.65% | 34.82% | $338.49 | $109.36 |
| 4. | Artisan Partners Asset Management Inc. | 11.74% | $37.19 | 10.57 | $3.04 B | 9.05% | 33.34% | 71.28% | $48.5 | $34.99 |
| 5. | Bath & Body Works, Inc. | 20.47% | $17.43 | 4.83 | $3.51 B | 4.46% | 32.37% | 3138.89% | $33.96 | $14.28 |
| 6. | HP Inc. | 10.6% | $25.58 | 9.16 | $23.38 B | 4.56% | 28.97% | 16.85% | $29.65 | $17.56 |
| 7. | Abercrombie & Fitch Co. | 13.83% | $75.34 | 6.93 | $3.42 B | — | 28.7% | 36.89% | $133.11 | $65.45 |