You won’t believe me, will you?
If there was a formula, you wouldn’t need an investment advisor or guide. You can just build a portfolio that will beat the market on its own.
But there is such a formula. And it works.
The ‘Magic Formula’ Was Created by a Hedge Fund Manager and Columbia University Professor Joel Greenblatt, It involves buying undervalued stocks based on two parameters – High income yield and return on capital (ROC).
Earning Yield tells us whether the company is available at an attractive price or not. The ROC tells us how well the company has used its capital.
The ‘Magic Formula’ gives equal importance to both the ratios while selecting companies. It then ranks those companies by both ratios.
The formula ultimately gives the best combined ranking of these companies. An investor can buy and hold these shares for at least one year.
Many fund management companies have given good returns with the help of this formula. Greenblatt himself claimed that he was able to generate a 30% return using the formula.
Here are five Indian stocks that rank well Parameters of the magic formula,
#1 P&G Hygiene & Health Care
The first stock on our list is P&G Hygiene & Healthcare.
The company is an Indian subsidiary of American multinational company, Procter & Gamble. It is engaged in manufacturing and selling of Branded Packaged Consumer Goods in Feminine Hygiene and Healthcare business.
Its portfolio includes popular brands like Whisper, Vicks and Old Spice.
P&G Hygiene and Healthcare rank top on both criteria of the magic formula. It has a RoC of 128% and an earnings yield of 1.3%.
The company’s revenue has grown at a CAGR of 13.3% in the last 3 years. Its net profit has grown at the rate of 20.3%. It has no debt on its books and its dividend yield is 2.1%.
In the latest quarterly results, P&G Hygiene reported a modest increase in revenue. However, the company reported a 15.4% year-on-year decline in net profit as profitability was impacted by commodity inflation and advertising spend.
#2 L&T Infotech
Next on our list is L&T Infotech.
L&T Infotech is an Indian information technology services and consulting company based in Mumbai, India.
The company provides a wide range of IT services such as Application Development Maintenance (ADM), Enterprise Solutions, Infrastructure Management Services, Testing, Analytics and Artificial Intelligence.
It has over 450 customers, 70 of whom are global Fortune 500 companies.
L&T Infotech has an ROC of 36.8% and an earnings yield of 1.7%.
The company’s revenue has grown at a CAGR of 19.2% in the last three years. Its net profit has grown at a CAGR of 20.3%. It also has no debt on the books.
For the December 2021 quarter, L&T Infotech reported 31% YoY growth in revenue and 18% YoY growth in net profit. It was on the back of robust and broad-based development.
Indian IT services companies reported a boom in business during the pandemic, as businesses shifted to higher use of digital technologies.
L&T Infotech hired over 1,200 people on a net basis during the quarter. Its workforce is 44,200. The company said it would continue to recruit as the business grows.
#3 Mindtree
The third stock on the list is Mindtree.
Like L&T Infotech, Mindtree is a multinational information technology services and consulting company. It is part of the L&T Group.
The company deals in e-commerce, cloud computing, digital transformation, data analytics and enterprise resource planning.
Mindtree has a RoC of 35.9% and an earnings yield of 1.6%.
Its revenue has grown at a CAGR of 13.4% in the last three years while its net profit has grown at a CAGR of 24.9%. Mindtree has no debt on its books.
In the latest quarterly results, the company reported 36% YoY growth in revenue. Net profit grew 34% year-on-year.
Mindtree recently unveiled a three-pronged strategy to maintain the momentum of revenue growth. The Bengaluru-based IT firm said it plans to accelerate its core portfolio, expand its emerging portfolio and incubate its new portfolio.
The company said it will strive to take customers, talent and stakeholders faster into the future.
#4 Divi’s Laboratories
Fourth on the list is Divi’s Laboratories.
Divi’s Laboratories is an Indian pharmaceutical company and manufacturer of active pharmaceutical ingredients and intermediates.
It manufactures and custom synthesizes generic API, intermediate and nutraceutical ingredients. The headquarter of the company is in Hyderabad.
Divi’s Lab has a RoC of 28.7% and an Earnings Yield of 1.7%.
The company’s revenue has grown at a CAGR of 21.7 percent over the last 3 years and net profit at a CAGR of 31.3%.
For the December 2021 quarter, Divi reported 46.5% YoY growth in revenue and 92% YoY growth in net profit.
The company has planned a capex of approx. 10-20 billion over the next two years depending on its investments in greenfield and brownfield projects.
There are some farmer and government related issues delaying the development of its Kakinada facility. However, it intends to start work immediately after the land is handed over.
#5 Indus Towers
Last name on the list is Indus Towers.
The company is engaged in the business of installation, operation and maintenance of wireless communication towers.
It has a tower market share of 31% and a tenancy market share of 42%. This makes it a leader in the telecom tower industry in India.
Its customers are Bharti Airtel, Vodafone Idea and Reliance Jio Infocomm.
The ROC of Indus Towers is 27.2% and the earning yield is 5%.
The company’s sales grew at a CAGR of 28.2% and net profit at a CAGR of 34.7%.
In its latest quarterly results, Indus Towers reported 3% YoY growth in revenue and 16% YoY growth in net profit as the telecom added more locations to tap decent data demand amid the pandemic.
The company has added over 9,000 towers in the last one year. With the expected launch of 5G in the near future, tower addition may accelerate.
In addition, the company may add towers in low penetration areas and will continue to invest in maintenance and upgradation of existing towers and take energy efficient initiatives to curb diesel consumption. Annual capital expenditure is expected to be higher 50 billion for the medium term.
Snapshot of the top stocks that passed the Joel Greenblatt filter from Equitymaster’s stock screener
Here is a quick look at the above mentioned companies based on some important financial parameters.
Please note that these parameters are subject to change as per your selection criteria.
This will help you identify and eliminate stocks that are not meeting your requirements and emphasize stocks that are well within the metrics.
Why you should invest in Magic Formula stocks
The Magic Formula is a tried and tested investment strategy.
It Combines Warren Buffett’s Quality Measures Benjamin Graham’s Deep Values Approach, It has worked for many fund management companies in the past and still does.
However, like all strategies, it has its limits.
The magic formula only applies to companies that have a market capitalization of more than US$100m. Therefore, it excludes small-cap stocks. It also excludes financial companies and utility companies.
If you are planning to invest in any Magic Formula stock, then assess the business fundamentals and prospects. Continued research should not be compromised despite positive odds.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from equitymaster.com
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