30 Magic Formula Investment Ideas in the UK

Dear Fellow Investor,

I am sure you have heard of the Magic Formula – if not here is a quick summary:

The Magic Formula was defined in an excellent book by Joel Greenblatt called “The little book that still beats the market”.

It identifies good quality companies that are trading at an attractive price.

It does this by looking for companies with a high earnings yield (companies that are undervalued) and a high return on invested capital (ROIC) (quality companies).

European Magic Formula Companies

As most of the writing on the internet is focused on Magic Formula companies in the USA, I thought you might be interested in a few Magic Formula companies in the UK.

What the screen looks like

To find the best Magic Formula companies this is what I screened for:

• Selected the best 20% Magic Formula companies.
• Only companies registered in the UK.
• To make sure the companies have high enough volume to easily buy and sell I selected companies with an average daily traded value of £100,000.
• Lastly I selected companies with a market value of more than £50 million to exclude really small companies.

Here are the top 15 Magic Formula companies the screen came up with:

Source: Quant-Investing  www.quant-investing.com

But the Magic Formula can be substantially improved.

Even though the Magic Formula generates very good returns, in a research paper Quantitative Value Investing in Europe: What Works for Achieving Alpha (www.amazon.com/dp/B00M8B01EE) we found that you can substantially improve the performance of the Magic Formula by adding positive momentum (increasing share price) to the screen.

You can read about the back test we did to test the Magic Formula with momentum here: Magic Formula and 6m momentum (www.quant-investing.com/strategies/magic-formula-pi-6m).

To add momentum to the screen I selected the 30% of companies with the best six-month share price momentum (largest share price increase over six months) and best Magic Formula ranked companies.

Here are the top 15 Magic Formula companies with positive six-month momentum the screen came up with:

Source: Quant-Investing  www.quant-investing.com

I hope this article has given you a few interesting ideas to research further.

Wishing you profitable investing.

Tim du Toit

www.quant-investing.com

Tim du Toit is head analyst and founder of Quant Investing. On his website he reveals what more than 25 years of equity investment has taught him – sometimes at considerable cost. To discover how you can quickly and easily find investment ideas that exactly fit your investment strategy, visit www.quant-investing.com.