In order to increase your chances of beating the market, one method is to choose stocks that rank highly according to the "Magic Formula" criteria.
Created by Joel Greenblatt (Trades, Portfolio), a prominent value investor and author of "The Little Book That Beats the Market," the Magic Formula ranks stocks based on a specific array of technical criteria, the most important being the earnings yield and return on capital.
In Greenblatt's book, these two financial ratios are defined a little differently than normal. Greenblatt calculates the earnings yield as earnings before interest and taxes (Ebit) divided by the enterprise value, while the return on capital is Ebit divided by net fixed assets and working capital.
In addition to high values in these two financial ratios, Magic Formula stocks are further narrowed down to be U.S. companies with a market capitalization of more than $100 million, as businesses that do not meet these criteria have different capital structures. Also, the Magic Formula does not take into consideration financial and utility businesses for similar reasons.
Below are three stock picks that rank highly on the GuruFocus Magic Formula screener.
Diebold Nixdorf
The first stock to consider is Diebold Nixdorf Inc. (DBD, Financial), a North Canton, Ohio-based software application provider of connected commerce solutions to a wide range of clients worldwide, including financial institutions and various retailers in North America and internationally.
The stock traded at $11.1 per share at close on July 16 for a market capitalization of $867.55 million. As of the end of the first quarter, it had an earnings yield of 2.91% and a return on capital of 71.87%.
Diebold Nixdorf's earnings yield ranks better than 63% of 2,443 companies operating in the software industry, while its return on capital ratio ranks better than 60% of 2,386 competitors.
The share price has risen by 87.97% over the past year to trade about 2.9% below the midpoint of the 52-week range of $5.73 to $17.13.
Currently, Diebold Nixdorf is not paying dividends as the last payment of 10 cents per common share was made on March 16, 2018.
GuruFocus has assigned a score of 3 out of 10 for the company's financial strength.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $19.25 per share.
Ovid Therapeutics
The second stock is Ovid Therapeutics Inc. (OVID, Financial), a New York-based biotech developer of therapies for the treatment of specific genetic diseases, including Angelman syndrome in adults, and several neurological disorders.
The stock traded at $3.7 per share at close on July 16 for a market capitalization of $250.89 million. As of March 31, the earnings yield is 294.12% and the return on capital is 535,021.21%.
Ovid Therapeutics' earnings yield ranks higher than 100% of 1,425 companies operating in the biotechnology industry, while the return on capital ratio ranks better than 100% of 1,356 competitors.
The share price has decreased by 49.86% over the past year, now representing an approximately 30.3% discount to the midpoint of the 52-week range of $2.25 to $8.37.
Currently, Ovid Therapeutics does not pay a dividend.
GuruFocus has assigned a score of 4 out of 10 for the company's financial strength.
On Wall Street, the stock has a median recommendation rating of overweight and an average target price of $4.88 per share.
Vontier
The third stock to consider is Vontier Corp. (VNT, Financial), a Raleigh, North Carolina-based manufacturer, seller and distributor of scientific and technical instruments that are reused in various processes, including manufacturing and repair, in the mobility infrastructure industry. The company operates globally.
The stock traded at $31.14 per share at close on July 16 for a market capitalization of $5.26 billion. As of the March 31, it has an earnings yield of 10.22% and a return on a capital ratio of 382.57%.
Vontier's earnings yield ranks higher than 80% of 2,364 companies that operate in the hardware industry and return on capital ratio ranks higher than 99% of 2,355 competitors.
The share price has declined by 8.41% over the past year to trade about 4.83% below the midpoint of the 52-week range of $26.3636 to $39.
On June 24, Vontier distributed a quarterly dividend of 2.5 cents per common share.
GuruFocus has assigned a score of 5 out of 10 for the company's financial strength.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $42 per share.
