Joel Greenblatt
Magic Formula
Joel Greenblatt's Magic Formula is a systematic, rank-based approach that identifies companies with high earnings yields (cheap) and high returns on capital (good). Rather than producing a pass/fail verdict, it ranks all stocks and recommends buying the top 20-30, holding for one year, then rebalancing. The approach is designed to be simple enough that anyone can follow it.
Methodology fidelity
Published rulesSources reviewed 2026-08-24The two formulas, separate universe ranks, combined rank, financial/utility exclusions, roughly one-year holding period, 20-30-stock diversification, and three-year commitment follow Greenblatt’s published method. The app also stores >10% earnings-yield and >25% return-on-capital stock-level checks for diagnostics and consensus scoring; those absolute cutoffs are app proxies and must not be confused with the actual cross-sectional ranking.
Valuation Method
No Magic Formula intrinsic value
No investor formulaThe Magic Formula ranks relative cheapness and quality; it does not produce a per-share intrinsic value. The app may calculate an earnings-power companion value elsewhere, but that is an app model and is not part of Greenblatt’s Magic Formula.
Screening implementation (3 criteria)
| # | Criterion | Metric | Threshold | Data Source |
|---|---|---|---|---|
| 1 | Earnings Yield | EBIT / Enterprise Value | Rank all stocks, best = rank 1 | Income Statement: EBIT; Market Cap + Debt - Cash |
| 2 | Return on Capital | EBIT / (Net Working Capital + Net Fixed Assets) | Rank all stocks, best = rank 1 | Income Statement: EBIT; Balance Sheet: NWC, Net PP&E |
| 3 | Combined Rank | Earnings Yield Rank + ROC Rank | Lowest combined score = best | Derived from criteria #1 and #2 |
Verdict Logic
RANK-based, not pass/fail. Buy the top 20-30 ranked stocks (lowest combined rank). Hold for 1 year, then rebalance. Exclude utilities and financial stocks. Minimum 3-year commitment to the strategy. Market cap floor > $50M.
What Would Joel Greenblatt Buy Today?
Sources
The Little Book That Still Beats the Market
primary2005 (rev. 2010)Joel Greenblatt
The primary source for the Magic Formula. Explains how combining two simple rankings (earnings yield and return on capital) can systematically identify good companies at bargain prices.
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