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 which 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.


Pre-Tax Earnings
Yield %

Pre-Tax Return
on Capital %

Recent Stock

CAPS Rating
(5 stars max.)

Bare Escentuals (NASDAQ:BARE)















Hugoton Royalty Trust (NYSE:HGT)










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
It's tough to dish out positive prospects for satellite TV provider DISH Network. Where analysts had been anticipating a net increase to subscriber rolls of 20,000, the network actually recorded a loss of 102,000 subscribers in the quarter. A year ago it had added 85,000 subscribers.

Things aren't looking up for 2009, either. In a wry acknowledgement, CEO Charlie Egan noted that 2008 "was kind of a year where our goal was to stop getting worse." DISH might have to extend that prognosis a little bit further. A deal with AT&T (NYSE:T) ended in February, and the network provider admitted its collaboration with the telecom giant had been a large part of the subscriber growth it had recorded. It accounted for 17% of gross subscriber additions for the year and 19% of gross subscriber additions in the fourth quarter. A weak economy and a moribund housing market -- despite a thready pulse in both lately -- exacerbated subscriber losses, along with signal theft and fraud.

Compare that to rival programmer DirecTV (NYSE:DTV), which was able to add more than 300,000 subscribers last quarter while lowering the cost of acquisition. And that lost DISH contract with AT&T? It ended up here, which just might help it achieve the 18 million in subscribership it's looking for. DISH Network has 13.7 million subscribers and the chasm between the two rivals looks like it will only widen.

Less than 80% of the investors rating DISH Network in the CAPS community expect it to outperform the market and it has achieved only a low, two-star rating. Yet CAPS member scoylesays thinks management has recognized the problems it has encountered and ought to provide a good, long-term opportunity.

dishnetwork has the best value in satellite tv, with announcements of more hd channels on the way with plans as low as 9.99, they seem to be doing the changes necessary in recapturing market share from directv. long term hold.

Maybe until a turnaround is evident, investors would be wise to heed the caution CAPS member MagicDiligence urges in his recent blog post on whether DISH Network ought to really qualify as a Magic Formula stock.

In conclusion, DISH Network is just not an MFI stock that MagicDiligence recommends picking up. While the company is clearly cheap against earnings and cash flow, the durability of those earnings is very much in question at this point in time.

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.

Bare Escentuals is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.