| Some great companies there for sure. For Greenblatt model though, I believe metric would be good roic and lowest expectation of success, as measured by the lowest EV/EBIT. |
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Correct! :-)
However, just buying high ROIC companies works too, I believe – Tobias Carlisle mentioned in one of his books that just buying highly profitable businesses (I think he talked about high NPM) has yielded around 15 % a year historically. I remember him saying that the Magic Formula has yielded a bit higher than that (something like 17 % a year), and that just buying cheap co.'s – low EV/EBIT (or maybe he used EBT, "the Acquirer's multiple") – has yielded slightly higher still, perhaps 18 % a year.
Personally, I'd rather go for 15 % from very profitable businesses (i.e., high ROIC as only screening metric), than 18 % from cheap (and generally poor) businesses (i.e., low EV/EBIT as only screening metric), as I am no longer comfortable owning cigar butts as a small, passive investor. It's just less pleasant to know that you own cheap shit! (With the Magic Formula, you still get mostly good companies, even if they are cheap. This is especially true if you screen only for companies with a reasonably long history of being profitable – Greenblatt doesn't mention that one should do that, I don't think, but Graham did so in his net-net strategy, and I think it makes sense in a MF strategy too, otherwise you might end up with truly bad co.'s that just happened to have a profitable year by chance.) |
