Magic Formula Investing Filter explained - In his book, "The Little Book That Beats The market", Joel Greenblatt laid out an investment formula for selecting a portfolio of shares that should beat the market over the long term. His formula contains a few grey areas. Sharelock Holmes has a screen for Greenblatt; although it is unlikely to be an exact replication of the formula. It is proably "good enough", though. As part of my filter, I select companies with a market capitalisation of at least £300m. Investment Trusts are excluded, not least because the database doesn't hold their details. They are unlikely to be suitable candidates in any event.
As at March 2011, this yields a universe approaching 400 companies, which is a goodly selection to choose from. I then focus on the top 40 stocks within that universe. The purpose of the MFI (Magic Formula Investing) filter is to find stocks that are "good and cheap". "Good" is measured by ROC (Return On Capital), calculated as EBIT (Earnings Before Interest and Taxes) to "tangible capital employed". "Cheap" is measured by EY (Earnings Yield), being EBIT/EV (Enterprise Value). Greenblatt uses a slightly modified version of EV. He also excludes financials from his screen, although I include them for simplicity's sake.
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BLT.L - BHP Billiton - Mining - 2587p/£56bn - BLT is a blue chip mining company with good prospects and a solid balance sheet. It qualifies as an MFI company, having high returns on captital available at an attractive price. It deserves a place in a diversified portfolio, despite some uncertainty about the direction of commodities.
Discussion
I could describe this company as a commodity play, but I wont. I have heard so many bullish and bearish arguments about commodities that it is impossible for me to decide who to believe. My feeling is this: mining is an important sector, so unless you have a strong bearish conviction about the sector, BHP Billiton (LON:BLT) deserves a place in a balanced diversified portfolio. If commodities tank, then BLT will likely tank, too. That's the risk you take. In a different post, I remained sanguine about the outlook.
There are other interesting miners/oil/gas companies in the MFI that are also likely to be worthy of attention, although I haven't looked at them myself:
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