Incorporating Magic Formula into stock screening

Joel Greenblatt may not be a well-known name to most retail investors, but his investing record and well rooted investment strategy deserves a look. After recommendation through a friend, I have skimmed through several books and the talks he gave. Coming from a fund management business like Peter Lynch, his description of the fund management business is startingly similar. Although he is not a smooth talker, his formidable intelligence and his active efforts to make his process understandable and simple is impressive.

Benjamin Graham version of “Magic Formula Investing” had a resounding investment record across the periods of the great Depression, where most companies are worth more dead than alive, active liquidation can bring about impressive returns, and wide diversification to counteract value traps. Joel Greenblatt’s Magic Formula is more focused on screening, longing the most profitable companies, and wide diversification / shorting the expensive stocks. To put it simply, buy a good business, pay a lot less. After trying to take a shortcut to google his methodology applications, I encountered the Motley Fools’ attempt to incorporate Magic Formula investing into Singapore Market. Based on my understanding of some of their underlying business, the quality of their outputs looks highly questionable and there simply might be no shortcut to investment success.

Motley Output
https://www.fool.sg/2019/01/07/the-30-best-shares-in-singapore-for-2019/

As I am self-attempting to incorporate VBA into my Growth at reasonable Price methodology, I will try to incorporate Greenblatt’s elements into my own screens and try to ensure what I do make sense. This will streamline my screening process and make me more productive and allows me to better scale my methodology into Hong Kong and US market.

SGX StockFacts Screening
1) D/E<60, PE<30, Profit margin>10, ROE>10, Market Cap >100 Mil,
2) Remove Cyclical industries, Volatile industries, Red Flags companies, business out of my circle of competence, Utility and Financial Stocks.
3) Using a ranking methodology, rank the companies with the desirable traits.

Cheap to relative Earnings
Low PE

High Profitability
High Net Profit Margin
High ROE

Low Solvency risk
Low Debt to Equity

Excel Spreadsheet output

Trading Name	Mkt Cap ($M)	Tot. Rev ($M)	P/E	Net Profit %	ROE %	Debt/Equity	Best ROE	Cheapest Earnings	Most Profitable	Lowest Debt
Best World	753.973	266.3	10.26	27.25	48.07	4.14	1	15	13	9
TalkMed	696.572	66.184	22.83	42.93	38.35	1.65	2	34	7	5
AEM	273.308	249.391	8.56	12.78	38.26	0.58	3	11	29	4
SGX	7908.721	874.73	21.36	42.4	37.2	0	4	32	8	X
Delong	627.617	2853.846	1.85	11.9	31.95	52.69	5	1	34	23
Silverlake Axis	1358.386	207.472	20.87	30.83	29.13	16.07	6	31	12	14
UnUsUaL	303.608	57.073	24.81	21.27	28.7	0.05	7	35	17	2
China Sunsine	535.168	621.798	4.45	19.34	27.84	0.48	8	3	19	3
Micro-Mechanics	223.841	62.079	15.76	22.88	25.32	0	9	23	15	X
Creative	290.637	76.618	8.15	43.67	24.51	0	10	10	6	X
VICOM	576.173	100.063	16.61	35.14	23.2	0	11	26	10	X
Singapore O&G	181.185	34.681	19.81	26.38	20.77	0	12	30	14	X
Fortune Reit HKD	20050.22	1940.106	3.33	308.79	20.34	40.1	13	2	1	18
UMS	345.997	127.939	8.03	33.34	19.42	10.3	14	9	11	11
Riverstone	733.229	301.9	17.22	14.08	19.33	3.95	15	28	27	8
Ascendas-iTrust	1369.437	181.971	7.08	112.39	19.3	54.85	16	7	3	27
InnoTek	128.261	214.922	4.93	11.17	16.58	0.03	17	5	36	1
SATS	5923.776	1779.984	22.33	15.35	16.5	6.44	18	33	24	10
Venture	4638.242	3557.347	11.28	10.6	16.1	1.81	19	17	37	7
Straco	660.386	117.88	15.67	37.44	15.2	18.7	20	22	9	16
HRnetGroup	777.813	428.49	16.22	12.23	14.92	0	21	24	32	X
Nordic	112	91.693	9.72	12.35	14.37	45.59	22	13	31	20
YZJ Shipbldg SGD	5917.377	4906.964	7.69	15.6	13.69	14.67	23	8	23	13
Stamford Land	419.083	446.065	6.11	15.31	13.37	56.2	24	6	25	28
Mapletree Com Tr	5557.53	443.893	9.52	131.18	13.09	54.38	25	12	2	26
Maruwa Yen1k	66561.36	41193.34	9.82	16.43	13.02	0	26	14	21	X
Q&M Dental	374.273	119.887	25.62	12.03	12.82	53.56	27	36	33	24
ISEC	162.366	40.444	18.76	21.45	12.65	0	28	29	16	X
First Resources	2705.39	863.189	16.54	20.16	12.6	51.06	29	25	18	22
Boustead Proj	326.4	248.218	10.41	12.36	11.79	34.64	30	16	30	17
Frasers L&I Tr	2352.439	218.378	12.55	84.22	11.59	44.59	31	19	4	19
Keong Hong	118.709	157.398	4.77	14.9	11.58	50	32	4	26	21
MM2 Asia	302.329	271.585	13.71	11.19	11.46	16.84	33	21	35	15
SIA Engineering	2787.809	1041.281	16.69	16.14	11.34	1.74	34	27	22	6
Mapletree Ind Tr	4184.335	367.67	12.65	83.96	11.26	54.21	35	20	5	25
Sarine Tech	121.865	79.718	11.67	12.99	11.15	0	36	18	28	X
MindChamps	164.288	36.96	25.73	17.55	10.87	12.26	37	37	20	12

4) Based on the statistically superior companies, start to do in depth analysis

Green Blatt’s original formula (Does not work all the time)
Highest Earning Yield (EBIT/enterprise value)
Highest ROIC (EBIT/ (net fixed asset + working capital))
Invest only in the highest ranked companies and diversify across 30 stocks, with annual rebalancing across a 5-10 year period.

Personal adjustments. 
Screening tools might not catch proper accounting complications as shown in SGX Stockfacts (Debt to Equity discernment) . Good to conduct the below as risk management process.

High Cash Flow and liquidity
Low P/CF
Low P/S
High and stable OCF
High FCFE
High EPS
High current ratio,
High Quick ratio,
High Cash ratio

High Profitability
Gross Margin
Operating Margin (Quality of underlying business)
Net Margin (Cost to profit ratio)
ROA
ROE
ROIC

Red Flag / Catalyst analysis
History of Corporate actions
Share Buyback and Insider Holdings
Diversify / Diwosify tendencies
Quality and track record of management.
General read through of general business outlook and determine if I have an edge in understanding it. General business performance across time.
Debt to equity. Nature of Debt and Equity (Preference shares, accounting reinstatements, complicated financial structures)

Scuttlebutt analysis
Circle of competence
Exposure to products and services of the company
Access to superior insights on the nature of the business.