Scores are algorithm-generated research tools, not investment recommendations.
Greenblatt-Style Magic Formula
A dual-ranking system that finds good companies at good prices by combining earnings yield (cheapness) with return on invested capital (business quality).
Score output: Percentile rank from top to bottom of our full stock universe
What is the Greenblatt Score?
The Greenblatt Score on AlphaStocks is a dual-factor ranking system inspired by Joel Greenblatt's "Magic Formula" from The Little Book That Beats the Market. It ranks every stock in our coverage on two dimensions simultaneously: earnings yield (EBIT / Enterprise Value, measuring cheapness) and return on invested capital (EBIT / Invested Capital, measuring business quality). Stocks that rank highly on both dimensions are, by definition, good businesses available at good prices. The genius of the combined ranking is that it prevents investors from falling into either trap: chasing cheap junk (high yield, low ROIC) or overpaying for quality (high ROIC, low yield). The percentile rank is converted to a 0-10 scale for integration into AlphaStocks' Value axis, where it contributes 30% of the Value axis at 15% composite weight, for an effective weight of 4.5%.
How does the Greenblatt Score work?
The Magic Formula rests on two pillars. Earnings Yield = EBIT / Enterprise Value. Greenblatt chose EBIT over net income because EBIT strips out tax rates and capital structure effects, making comparisons fairer. Enterprise value (market cap plus debt minus cash) captures the full acquisition cost of the business. A higher earnings yield means more earnings per dollar invested -- an earnings yield of 10% means you effectively earn 10% on the purchase price before growth.
Return on Invested Capital (ROIC) = EBIT / (Net Fixed Assets + Net Working Capital). ROIC measures how efficiently a company converts capital into profit. A company earning $100M on $200M of capital (50% ROIC) is far superior to one earning $100M on $2B (5% ROIC). High ROIC is the quantitative footprint of a competitive advantage -- companies with moats earn outsized returns because competitors cannot easily replicate their advantages.
The ranking process: Step 1, rank all stocks in our coverage by earnings yield from highest to lowest. Step 2, rank all stocks by ROIC from highest to lowest. Step 3, add the two ranks together. The lowest combined rank is the best -- it means the company scored highly on both cheapness and quality. Step 4, convert the combined rank into a percentile. Top 10% (0-10th percentile) represents the best combinations in the index.
AlphaStocks enhances the original formula with sector-aware context. Financial companies are ranked within their own peer group using modified ROIC calculations since their capital structures make cross-sector ROIC comparisons meaningless. Capital-intensive industries (utilities, materials, energy) get within-sector percentile rankings in addition to overall rankings. The percentile is converted to a 0-10 scale: top 5th percentile scores 9-10, top 10th scores 8-9, median scores 5, bottom 10th scores 0-2.
What does Greenblatt look for in a stock?
The Magic Formula ranks stocks on two dimensions simultaneously. Here is what each dimension evaluates:
High Earnings Yield
Pass
EBIT / Enterprise Value places the stock in the top quartile of our coverage. You are getting substantial earnings per dollar of enterprise value -- the stock is genuinely cheap.
Fail
Earnings yield in the bottom quartile. The market prices every dollar of earnings at a premium, requiring strong growth to justify the valuation.
High Return on Invested Capital
Pass
EBIT / Invested Capital places the stock in the top quartile. The business converts capital into profit efficiently, indicating a competitive advantage.
Fail
ROIC in the bottom quartile. The business requires enormous capital to generate returns, suggesting weak competitive positioning.
Combined Rank in Top Decile
Pass
The sum of earnings yield rank and ROIC rank places the stock in the top 10% of our coverage. This is a good business at a good price -- the intersection the Magic Formula was designed to find.
Fail
Combined rank in the bottom half. The stock is either expensive, low quality, or both.
Positive EBIT
Pass
The company has positive operating earnings, allowing meaningful earnings yield and ROIC calculations.
Fail
Negative EBIT makes both calculations meaningless. The stock is excluded from the ranking.
Sector-Appropriate Comparison
Pass
For financial companies, ROIC is calculated using sector-adjusted metrics and ranked within the financial peer group. For capital-intensive industries, within-sector percentiles provide additional context.
Fail
Raw cross-sector comparisons would systematically favor asset-light technology companies over capital-intensive utilities, producing misleading rankings.
How AlphaStocks uses Greenblatt
The Greenblatt-Style Magic Formula contributes 30% of the Value axis, which carries 15% of the composite score, giving it an effective weight of 4.5%. Its unique contribution is the dual-ranking approach -- evaluating cheapness relative to business quality rather than in isolation.
Where Graham-Style evaluates cheapness relative to assets and earnings, and Lynch-Style evaluates cheapness relative to growth, Greenblatt-Style evaluates cheapness relative to how efficiently the company uses capital. The three together provide a comprehensive value assessment: Graham answers "is it cheap in absolute terms?", Lynch answers "is it cheap relative to growth?", and Greenblatt answers "is it cheap relative to how good the business is?"
A stock that scores well on all three Value models is undervalued by every reasonable definition. Greenblatt's original research showed the Magic Formula generating approximately 30.8% average annual returns over a 17-year period (1988-2004) versus 12.4% for the S&P 500. The two-factor approach (cheap plus quality) has been confirmed by subsequent academic studies.
Greenblatt effective weight = 30% × 15% = 4.5% of the composite scoreCurrent top stocks by Greenblatt
The Greenblatt-Style Magic Formula model is evaluated for all 1,595 stocks in our coverage. You can filter the full rankings table to see which stocks currently score highest on this model and compare them across all five investment frameworks.
Frequently Asked Questions
What is the Magic Formula in stock investing?
The Magic Formula, developed by Joel Greenblatt, is a stock-ranking system that combines two factors: earnings yield (EBIT / Enterprise Value, measuring cheapness) and return on invested capital (EBIT / Invested Capital, measuring quality). Stocks that rank highly on both are good businesses at good prices. In backtests, this approach returned approximately 30.8% annually over 17 years versus 12.4% for the S&P 500.
How does the Greenblatt Score rank stocks on AlphaStocks?
AlphaStocks ranks all 1,595 stocks in our coverage by earnings yield (highest to lowest) and by ROIC (highest to lowest), then adds both ranks. The lowest combined rank is best. This percentile is converted to a 0-10 scale: top 5th percentile scores 9-10, median scores 5, bottom 10th scores 0-2. Financial companies are ranked within their own peer group.
Why does the Magic Formula use EBIT instead of net income?
EBIT (earnings before interest and taxes) strips out the effects of tax rates and capital structure. Two companies with identical operations but different tax situations and debt levels will have different P/E ratios but the same earnings yield using EBIT. Combined with enterprise value (not just market cap), this creates a fairer comparison of what you pay for the actual earnings stream.
What is return on invested capital (ROIC) and why does it matter?
ROIC = EBIT / (Net Fixed Assets + Net Working Capital). It measures how efficiently a company turns capital into profit. A 50% ROIC means the company earns 50 cents for every dollar invested -- this is the quantitative footprint of a competitive advantage. Companies with consistently high ROIC (above 20%) are typically doing something competitors cannot easily replicate.
Does the Magic Formula work for bank stocks and financial companies?
Financial companies have capital structures that make standard ROIC comparisons with non-financial companies meaningless. AlphaStocks addresses this by ranking financial companies within their own peer group using sector-adjusted metrics. This means a bank in the top 10% is the best among banks, not compared against asset-light tech companies.
See all 1,595 stocks scored
Every stock evaluated by Greenblatt-Style Magic Formula and four other proven investment models. Updated with every SEC filing.
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Model names reference the published investment methodologies of their respective authors. AlphaStocks is not affiliated with, endorsed by, or sponsored by Joel Greenblattor any related entities. Our implementation is an interpretation of publicly described principles and may differ from the original author's approach.
AlphaStocks provides investment research and analysis, not investment advice. Past performance does not guarantee future results. Always do your own due diligence before making investment decisions. Data sourced from SEC EDGAR and Alpaca Markets.