What does Magic Formula Rank mean?
This is the actual (as opposed to percentile) ranking of a stock according to Joel Greenblatt's Magic Formula. It sums its Earnings Yield and Return on Capital rankings, so a company that was 14th on an EY basis and 96th on an ROC basis would have a score of 110th. Theoretically, the best company would have a score of 2nd but that assumes that it is top of both lists, which is unlikely.
For the purposes of this calculation, only companies above a market capitalisation of £10m are included (Greenblatt uses a threshold of $50m).
Stockopedia explains Magic Formula Rank...
Joel Greenblatt's Little Book that Beat the Market became a financial publishing phenomenon. In a simple writing style, the successful hedge fund investor showed how picking 'good' stocks at 'cheap' prices was enormously profitable. He claims that a portfolio of the top 30 Magic Formula stocks has averaged a 17-year annual return of 30.8% and beats the S&P 500 96% of the time. It should be noted that these returns are volatile and require a fully diversified portfolio. Greenblatt suggests sticking to A+ stocks (in the top 10%) for the best chance of outperformance and ideally to a basket of the top 50 ranked stocks in the market.
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