5 Magical Stocks

When fund manager Joel Greenblatt published his investing tome, The Little Book That Beats the Market, in 2005, it marked a unique point for investors. They now had in their hands insights into investing strategies that a value investing master himself used and are also easily replicated. As proof, Greenblatt has achieved phenomenal results over the past two decades, besting even the performance of Warren Buffett.

The strategy is deceptively simple: Buy undervalued, high-performing companies and hold for a year. Wash, rinse, and repeat. But what if we can augment Greenblatt's methodology? Below we've used a "magic formula"-like screen that approximates the pre-tax earnings and return on capital criteria he lays out, but adds to it the ratings from our Motley Fool CAPS investor intelligence database. Combining those rankings with the criteria that Greenblatt suggests should give us winning investments that may just produce some outsized returns.

Here are a few companies that showed up when I ran this screen recently.

Source: CapitalIQ, a division of Standard & Poor's; Motley Fool CAPS. Pre-tax earnings yield is inverse of EV/EBIT. Pre-tax ROC is EBIT divided by tangible capital employed.

Although Greenblatt's strategy is a mechanical one, we don't think you should just rely upon this as simply a list of companies to buy. Due diligence on this narrowly focused list of companies is always a smart requirement. So, let's see what CAPS members have to say about a couple of these.

A little bit of pixie dust
You won't confuse the heavy duty General Dynamics notebook computer for the MacBook Air. Where the Apple (NASDAQ:AAPL) ultrathin, ultraportable laptop weighs in at a feather-like three pounds ("feather-like" for laptops anyway), the rugged GD8000 tips the scales at almost eight pounds and comes housed in a magnesium chassis wrapped in a polycarbonate casing. Of course, the MacBook Air isn't likely to be subjected to the same harsh extremes of temperature, humidity, and environment that the General Dynamics version will.

Although most investors might first think of GD's armor-plated vehicles, Gulfstream executive jets, or even nuclear-powered submarines, the defense contractor also has a line of computers to meet its client's extreme needs. For example, the military requires that a computer survive a three-foot drop and be able to boot up 26 times afterwards, but a manufacturer can use five different laptops to complete the test. General Dynamics says it used just one, dropped it from 42-inches while it was running, and successfully got it to boot up the requisite number of times. Apparently it's also withstood 30 gallons of water blasted at it at 40 mph for four hours to simulate a rainstorm.

The information systems and technology segment accounts for one third of General Dynamic's revenues, but it's the Gulfstream division causing it headaches these days. Executives are loathe to fly jets these days with an angry public viewing them as symbols of corporate excess. Profits this year are forecast to be lower than previously thought as it cuts output of the Gulfstream aircraft and the jobs that go with it because of weakening demand. They're not alone, either, as Textron (NYSE:TXT) is cutting its workforce related to its Cessna division.

Despite that, 69% of its revenues are derived from the U.S. government, and that has investors feeling its future remains secure. CAPS member KnockoutMouse believes it's simply a matter of national defense that cements its place as a winning investment.

This company makes the armored vehicles that help our troops survive in the guerrilla warfare environments of the future. They make the submarines , destroyers and littoral combat vessels that will be the basis of naval power in the 21st century. America needs this stuff no matter how the economy is doing or who the President is because our basic security depends on it. The stock is trading near a 52-week low and yielding over 4%. In fact, they just boosted their dividend while most other companies are cutting theirs, that should tell you something about their future.

Beat the street
While he's provided an interesting magic formula, you'll need to read more than a few pages of Greenblatt's book to make your buy or sell decisions. So start your own research on these stocks on Motley Fool CAPS where your opinion can still save the day. While there you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page.