Which are the best magic formula stocks in India?
As per Equitymaster's Stock Screener, here are the list of the best magic formula stocks in India right now...
These stocks have been ranked based on two parameters - high earnings yield and high return on capital (RoC).
Note that, there are various other parameters you should take into account before investing in any company such as promoter holding etc. Sustained research must not be compromised despite the positive odds.
What is the magic formula for investing in stocks?
The 'Magic Formula' was created by hedge fund manager and Columbia University professor Joel Greenblatt. It involves buying undervalued stocks based on two parameters - high earnings yield and return on capital (RoC).
The earnings yield tells us whether the company is available at an attractive price. The RoC tells us how well the company has used its capital.
Here's a list of Indian stocks that could qualify per Joel Greenblatt's criteria...
How do you calculate the magic formula?
The 'Magic Formula' gives both earnings yield and return on capital equal weightage while selecting companies. Then it ranks those companies by both ratios.
Earnings yield = EBIT (Earnings before interest and taxes) ÷ Enterprise Value
Return on capital = EBIT (Earnings before interest and taxes) ÷ (Net Fixed Assets + Working Capital)
How do you rank stocks using the magic formula?
Once you calculate both ratios, you must combine both and rank the companies in descending order.
One can then buy two to three positions each month in the top 20 to 30 companies, over the course of a year. Each year, rebalance the portfolio by selling off losers one week before the year term ends and sell off winners one week after the year mark.
Repeat the process each year for a minimum of five to 10 years or more.
Does magic formula investing work?
Yes, it does. With the help of this formula, several fund management companies have generated significant return. Greenblatt himself claimed that he was able to generate a 30% return using the formula.