Joel Greenblatt, founder of the Magic Formula and Gotham Funds, appeared on CNBC on September the 23rd to discuss his buy/short sell strategy and mentions large caps in the Russell 1000 (mainly mid to large caps) have better valuations than those of the Russell 2000 in which Joel Greenblatt mentions stocks 1001-3000?
It’s a short video but followers of Joel Greenblatt know he has been using this strategy of buying the “cheapest” stocks and shorting the most “expensive” stocks for the past couple of years. It’s the same strategy he talks about in The Big Secret for the Small Investor which was released in 2011.
I won’t touch upon the names he mentions as short candidates as in previous interviews he mentions he uses leverage when the price moves against him but Greenblatt did mention 3 large caps that according to his research partner , offer value. Raytheon (RTN) is currently a magic formula stock and the other two have previously appeared on the magic formula screen.
Earnings Yield: 8.10% Return on Capital : 163.47%
Verisign is interesting considering it has a monopoly in domain registration (.com, .net, .org, etc) but it also has a strong Internet Security and IT division that delivers strong free cash flow. Warren Buffett’s Berkshire Hathaway has also been accumulating shares of Verisign and now owns roughly 10% of the shares outstanding with an average price of $46.
Earnings Yield:9.30%, Return on Capital: 148.41%
A current magic formula stock along with several defense contractors, Raytheon definitely looks interesting considering the current turmoil in the Middle East.
Towers Watson & Co. (TW)
Earnings Yield: 7.70% Return on Capital: 104.35%
I can’t remember if Towers was a magic formula or not but it’s current earnings yield is not attractive. From the three stocks, it has the lowest earnings yield and the lowest Return on Capital. It wouldn’t make sense to put money on option C, when option A & B are more attractive. An interesting point, Joel Greenblatt increased his stake in the company by almost 400,000 shares. It’s significant considering he had roughly 30,000 in the first quarter.