Value Investing Pro

Here’s a little secret, I spend most of my online time on a handful of sites. In particular, I spend about 80% of my time on two sites. The first is Morningstar.com in which I am a premium user and use it mostly to do basic security analysis, look at 10 years of financial data, etc.. Secondly, I spend a ton of time on Google Finance. Before moving on , I want to make a disclaimer that I am a big Google user. I use its search engine, mail, feed reader, webmaster central, Adsense, Adwords, and a few other Google products. I find Google’s products simple to use and more importantly, beneficial. Now, back to Google Finance. Google Finance is relative new to other major finance sites such as MSN Money and Yahoo Finance.  It launched in 2006 and was pretty basic. You entered a stock symbol, and Google Finance returned a stock quote, chart and a few links to outside sources. Like every other Google product, Google Finance slowly but surely started to become more interesting. One of those things that made Google Finance a hair more interesting is its stock screener. And from that stock screener, we can create a custom magic formula screen.

Why Create A Custom Magic Formula Screen

1. First of all, always use the free official magic formula screen at magicformulainvesting.com Its the website solely dedicated to The Little Book That Beats The Market.
2. As a magic formula investor, there is no guarantee magicformulainvesting.com will be around in 10 years. Although, according to whois.net, the URL is registered until 2013. Yet, I want to have a backup “just in case”.
3. You can search for more companies, including foreign stocks. The official magic formula screen currently allows users to search for screens with 30 and 50 companies. Prior to the site update which occurred in February 2009, users were allowed to search for the top 25, 50 and 100.
4. You can search for smaller companies. In the same  February 2009 update, users are now limited to choosing stocks with a market cap greater than or equal to 50 million. If you have seen this Bruce Greenwald Value Investing Video or this Paul Sonkin video, value is often found in small obscure companies.

Magic Formula Screen Parameters As Described In The Little Book That Beats The Market

General screening instructions can be found on the chapter titled “Step-by-Step Instructions” found on page 135. The first 2 bullet points (found on page 136) are the important ones.

Use Return on Assets (ROA) as a screening criterion. Set the minimum ROA at 25%. (This will take place of return on capital from the magic formula study.)

From the resulting group of high ROA stocks, screen for those stocks with the lowest Price/Earnings (P/E) ratios.(This will take the place of earnings yield from the magic formula study.)

Creating A Custom Magic Formula Screen In “X” Steps

1. Go to Google Finance’s Stock Screener, which can be found on the upper left hand.
2. It will take use to the default stock screener which has Market Cap, P/E Ratio, Div Yield and 52 Week Price Range.
3. “X” out 52 Week Price Range and Div Yield (Div. Yield is optional)
4. Click on “Add Criteria”; we will be searching for companies with ROA greater than or equal to 25. I also like to add the 5 year average. By adding the 5 year average, we have a better understand of its “normal” ROA. To do this go to Add Criteria<Operating Metrics<Return On Assets. Set the range between 25 and 100
5. Set the P/E range between 5 & 20. On page 136, Joel Greenblatt does mention a P/E less than 5 might indicate the previous year, or the data, might be unusual.  I never purchase a stock with a P/E greater than 20, even that might might be a bit too high as most magic formula stocks have a P/E less than 15, but 20 will give us some interesting results and sometimes better quality names.

Custom Magic Formula Screen Results

Below is a screen shot of the results produced. I circled the stocks that currently appear on the official magic formula screen or that have appeared on it from recent memory.

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