5 ‘Magic’ Greenblatt Strategy Stocks: De La Rue plc, WPP PLC, Carillion plc, Mitie Group PLC & Ladbrokes PLC

De La Rue plc (LON: DLAR), WPP PLC ORD 10P (LON: WPP), Carillion plc (LON: CLLN), Mitie Group PLC (LON: MTO) and Ladbrokes PLC (LON: LAD) all qualify for Joel Greenblatt’s Magic Formula screen.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Joel Greenblatt’s ‘Magic Formula’ is one of the most successful stock-picking strategies of all time.

First published within his book The Little Book that Beats the Market, Greenblatt’s data showed that over a period of 17 years, stocks qualifying for the screen outperformed the market by around 30.8% per annum. 

Market screen 

The Magic Formula screen looks for companies that are both cheap and produce a high return on investment. Every month, analysts at investment bank Société Générale put out a list of companies that they believe qualify for the screen. 

The bank’s analysts rank companies based in their return on capital and valuation, using criteria similar to those devised by Greenblatt. Analysts place those companies with the highest return on capital, but lowest valuation at the top of the list. 

All stocks in the FTSE World Developed and FTSE 350 indexes are included in the screen.

This month there were only five UK companies that made it into the top 25 qualifying companies.

High returns 

Commercial banknote printer, De La Rue (LSE: DLAR) comes out on top thanks to the company’s ability to literally print money.  

Indeed, De La Rue’s ROCE — a metric that compares how much money is coming out of a business, relative to how much is going in — eclipses that of its peers. 

During its last financial year, De La Rue’s ROCE totalled 49.6%. To put that into perspective, according to my figures less than 3% of the world’s 8,000 largest companies managed to achieve an ROCE of greater than 40% last year.

Moreover, the group currently trades at a historic P/E of 11.5.

Market leader 

Next to qualify is marketing giant WPP (LSE: WPP). WPP’s strengths lie in the group’s rapid growth over the past six years and the ability to create value for shareholders. 

Since 2009, WPP’s earnings per share have expanded at an annual clip of 18%. Over the same period, the company’s shares have returned 17.9% per annum, outperforming the FTSE 100 by 9.1% p.a. 

WPP currently trades at a forward P/E of 14.8 and supports a dividend yield of 3.1%. 

Bargain bucket 

Carillion (LSE: CLLN) qualifies for the Greenblatt screen due to the company’s bargain basement valuation and steady ROCE. 

Carillion’s ROCE has averaged 9.5% p.a. during the past six years, one of the highest returns in the construction sector. The company currently trades at a forward P/E of 9.6 and supports a dividend yield of 5.5%. 

Similarly, both Mitie (LSE: MTO) and Ladbrokes (LSE: LAD) qualify for the Greenblatt screen due to their low valuations and steady returns on capital. 

Mitie currently trades at a forward P/E ratio of 12.7 and supports a dividend yield of 3.8%. The company’s ROCE has averaged 12.6% p.a. during the past six years. Since 2010, Mitie’s earnings per share have increased at a steady 8% p.a. and this growth is set to continue. 

Falling earnings 

City analysts expect Ladbrokes’ earnings per share to fall by a third this year. On this basis, the company is trading at a forward P/E of 17.7.

However, Ladbrokes is cheap on an enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) basis. The group trades at an EV/EBITDA multiple of 7.5, almost half the sector average of 14. 

Ladbrokes supports a dividend yield of 5.8%. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »