Forget Apple or Tesla
If you use Joel Greenblatt's official Magic Formula screener, you will rarely encounter the familiar names that dominate the headlines. No Nvidia, no Tesla, and no Apple. Instead, you are presented with a list of obscure, seemingly incredibly boring, or disgraced companies.
The formula looks exclusively for a high Return on Capital (Quality) and a high Earnings Yield (Price). Not sure how these metrics work? Read our 5-minute explainer of the Magic Formula. To illustrate what such a portfolio looks like in practice, here are the types of stocks the formula regularly selects.
Note: this is not financial advice, but an educational representation of the type of companies that typically make it through the quantitative filter.
1. The Boring Industrial Manufacturer
Think companies that make specialised bolts or filters for the automotive industry. No one talks about them at dinner parties, there is little growth, but they generate massive amounts of free cash flow at an extremely low valuation.
2. The Punished Retailer
A physical retail chain whose stock price has been halved because analysts shout that "online shopping is killing the physical store". Yet the company turns out to still be highly profitable on invested capital and is quietly buying back its own shares.
3. The Spinoff (Divested Division)
Joel Greenblatt loves spinoffs. A large parent company spins off a smaller division to the stock market. Institutional investors often dump these shares immediately (because they don't fit their mandate), making the stock temporarily artificially low and pushing it to the top of the Magic Formula list.
4. Niche Pharmaceuticals
Not big names like Pfizer or J&J, but smaller pharmaceutical companies that hold the patents on a specific veterinary drug or a niche ointment. The growth prospects might be limited, but the return on capital is sky-high.
5. Regional Service Providers
Companies with a local monopoly in an incredibly boring sector — waste management, pest control, or specialised cleaning services. They require low reinvestment costs (which boosts ROC) and operate under the radar of major Wall Street analysts.
6. Troubled Consumer Brands
Think of a company making pans or kitchenware where the CEO recently resigned due to a scandal. The stock price has collapsed, but the fundamental profitability of the products has remained intact. The formula spots this discount immediately.
7. Small B2B Technology / Software
Not AI-hype companies, but businesses that have been providing outdated but crucial software to government agencies or specific niches for 20 years. They are unattractive to growth investors, but pump out a lot of profit year after year.
Why You Should Follow the List Blindly
When you look at these stocks, your first reaction is probably: "Why on earth would I buy this?" And that is exactly the power of the Magic Formula. It buys stocks that human investors hate, but where pure math shows they are systematically undervalued. The discomfort you feel is the source of the excess return.
That discomfort is deeply rooted in human psychology — we explain exactly why in The Psychology Behind Magic Formula Investing. Ready to find these hidden gems yourself? Explore the best Magic Formula screeners available today.
