Magic Formula outside US

[DamienC]

Stumbled on this post from earlier this year on Greenblatt’s Magic Formula. It was bashed repeatedly around the web due to its recent underperformance. Food for thoughts.

 

https://research.nava.capital/magic-formula-globally-just-a-start/

[starmitt]

The one thing that bothers me about these tests is the quarterly rebalancing. I believe the original MF called for holding for one year + one day. Without more details on how this was handled, not sure how to interpret the results. Maybe I missed something.

 

 

 

 

[LC]

That's correct - to hit LT capital gains tax.

 

Also what bothers me is putting conditions. "MF outside the US"

 

Okay, when that doesn't work what will it be next? "MF outside US and Southern Europe"

 

"MF outside US, S. Europe, China"

 

"MF on these 30 stocks from another screener I just ran"

 

Also, I don't like using EBIT.  I never have. Is interest not an expense? Taxes? Do they not provide informative value about the business itself? I'd argue they do.

[CorpRaider]

What's the twist?

 

Why hasn't IVAL done this?

[TwoCitiesCapital]

 

Also, I don't like using EBIT.  I never have. Is interest not an expense? Taxes? Do they not provide informative value about the business itself? I'd argue they do.

 

Isn't to make it agnostic of the capital structure and not used an an actual proxy for shareholder return?

 

Same company can be financed by debt with a high ROE or by equity with a low ROE. But EBIT is the same for each and reflects that financing can change and that ROE is fluid and impacted by that.

 

You wouldn't want to discriminate against a company with low ROE because it's equity financed right before it goes in a debt-funded repurchase.

 

[LC]

@2CC: that is true but in practice, MF is not designed to exploit capital structure nor is it aimed at PE firms.

 

MF is composed of a quality (ROIC) and cheapness (EBIT:EV) component.

 

Assessing price based on EBIT is assessing the price of the entire enterprise, which I would argue is more useful to a takeout firm than a minority equity investor.