Which are the top stocks in India that pass the Joel Greenblatt filter?
As per Equitymaster's Stock Screener, these stocks could potentially meet Joel Greenblatt's investing criteria.
Joel Greenblatt believes that a company with the ability to invest in its business and earn a strong return on investment is usually a "good" company.
Investors are inspired by Greenblatt's ability to pick winning stocks that deliver long-term returns.
Who is Joel Greenblatt?
Joel Greenblatt is an American fund manager and investor.
At present, he is the co-Chief investment officer and the managing principal of Gotham Asset Management, an investment firm he founded in 1985. His fund, a hedge fund, generated a whopping 40% annual return to investors every year for 20 years.
What is the Joel Greenblatt style of investing?
Greenblatt is well-known for his 'magic formula' for scouting investments.
This method of investing combines companies with high earnings yield and those with a high return on invested capital (RoIC).
His basic premise is that companies that can earn a high return on capital over time generally have a special advantage that keeps competition from destroying it. It could be name recognition, a new product that is hard to duplicate or even a unique business model.
Therefore he strongly advocates investing in such companies.
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.
Which are the books written by Joel Greenblatt?
Greenblatt has penned down a total of five books that reflect the core values used by him to manage his portfolio.
So far Greenblatt has written -
- The Little Book That Beats the Market
- The Little Book That Still Beats the Market.
- You Can Be a Stock Market Genius
- The Big Secret for The Small Investor
- Common Sense: The Investor's Guide to Equality, Opportunity, And Growth