15 Magic Formula Investment Ideas In Europe by Tim du Toit, Quant Investing
I am sure you have heard of the Magic Formula, if not here is a quick summary.
The Magic Formula was defined in the 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.
And does this by looking for companies with a high earnings yield (companies 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 will be interested in a few Magic Formula companies in Europe.
What the screen looks like
To find Magic Formula companies do the following:
- First select the top 20% Magic Formula companies.
- Under Countries select Europe, Scandinavia, the UK and Switzerland.
- To make sure the companies have high enough volume for you to invest select companies with an average daily traded value of €100,000.
- Lastly select companies with a market value of more than €50 million.
This is what the completed screen looks like:
Click image to enlarge
Source: Quant-Investing
Here are the top 15 Magic Formula companies the screen came up with:
Click image to enlarge
Source: Quant-Investing
But the Magic Formula can be substantially improved
But as you may know in the research paper Quantitative Value Investing in Europe: What Works for Achieving Alpha we found that you can substantially improve the performance of the Magic Formula by adding momentum 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
To add momentum to the screen select the 30% of companies with the best 6 month share price momentum (Price Index 6m).
This is what the screen looks like:
Click image to enlarge
Source: Quant-Investing
Here are the top 15 Magic Formula companies with positive momentum the screen came up with:
Click image to enlarge
Source: Quant-Investing
I hope you the screen has given you a few interesting investment ideas to research further.
Wishing you profitable investing
Tim du Toit
