The Little Book That Beats the Market (Little Books. Big Profits 8)

by Joel Greenblatt

Option 2: General Screening Instructions If using any screening option other than magicformula investing.com, you should take the following steps to best approximate the results of the magic formula: • Use Return on Assets (ROA) as a screening criterion. Set the minimum ROA at 25%. (This will take the place of return on capital from the magic formula study.) • From the resulting group of high ROA stocks, screen for those stocks with the lowest Price/Earning (P/E) ratios. (This will take the place of earnings yield from the magic formula study.) • Eliminate all utilities and financial stocks (i.e., mutual funds, banks and insurance companies) from the list. • Eliminate all foreign companies from the list. In most cases, these will have the suffix “ADR” (for “American Depository Receipt”) after the name of the stock. • If a stock has a very low P/E ratio, say 5 or less, that may indicate that the previous year or the data being used are unusual in