BHP Billiton - a Magic Formula Company

Wednesday, Apr 13 2011 by
BHP Billiton  a Magic Formula Company

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.

Elevator Pitch

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.


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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BHP Billiton Plc is a global resources company. The Company is a producer of various commodities, including iron ore, metallurgical coal, copper and uranium. Its segments include Petroleum, Copper, Iron Ore and Coal. The Petroleum segment is engaged in the exploration, development and production of oil and gas. The Copper segment is engaged in mining of copper, silver, lead, zinc, molybdenum, uranium and gold. The Iron Ore segment is engaged in mining of iron ore. The Coal segment is engaged in mining of metallurgical coal and thermal (energy) coal. Its businesses include Minerals Australia, Minerals Americas, Petroleum and Marketing. It extracts and processes minerals, oil and gas from its production operations located primarily in Australia and the Americas. It manages product distribution through its global logistics chain, including freight and pipeline transportation. It sells its products through direct supply agreements with its customers and on global commodity exchanges. more »

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1 Comment on this Article show/hide all

Mark Carter 18th Apr '11 1 of 1

Just read Mr. Baine's cautionary notes on the Glencore IPO. He notes "are Glencore management calling the top of the commodity market?" He makes lots of valid points, and it has gotten me increasingly itchy.

So, I want to re-emphasise the point in my original article about BHP Billiton (LON:BLT) being part of a balanced portfolio.

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About Mark Carter

Mark Carter

I am a private investor living in Scotland. I am a computer programmer by trade.


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