5 Magical Stocks

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

His strategy is deceptively simple: Buy undervalued, high-performing companies and hold for a year. Wash, rinse, and repeat. But what if we could augment Greenblatt's method? 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 Greenblatt's criteria should give us investments that might just produce some outsized returns.

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

Source: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS. Pre-tax earnings yield is inverse of enterprise value/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 rely on this as simply a list of companies to buy. Due diligence is always smart. Let's see what CAPS members have to say about one of these companies.

A little bit of pixie dust
Can heavy-construction company Foster Wheeler engineer a turnaround? Revenue in its latest quarter fell 30% to $1.3 billion, well below analyst expectations of $1.5 billion, causing profits to plunge sharply. Earnings got cut nearly in half to $72.9 million, or $0.57 a share, though a good portion of that shortfall owed to unfavorable currency exchange rates.

While we know that the worldwide economic situation isn't exactly favorable right now, both Fluor (NYSE:FLR) and Jacobs Engineering (NYSE:JEC) reported increases in both revenues and earnings. Fluor's profits rose 50% in the first quarter, and Jacobs Engineering's were up 10%.

However, the future may hold some promise for others in the heavy construction sector. Foster Wheeler said that backlog in its engineering and construction group had reached an all-time high in terms of man-hours; coupled with a new refinery project in India, that could bring in greater revenue. The company also announced a smaller project for solar steam engines in Spain. In contrast, both Fluor and Jacobs Engineering have reduced guidance for the rest of the year.

Yet even with Foster Wheeler's shares up 25% this month, they're still trading for just a third of the price they reached at their highs one year ago, and they change hands at a multiple of just seven times earnings. Fluor, Jacobs Engineering, and even KBR trade at higher valuations. As the dollar remains weak, Foster Wheeler's international business might seem cheaper than a domestic company's offerings. That means revenue could rise, but it also could end up hurting when the company translates the amount back into dollars. Still, this could be the beginning of the turnaround investors are looking for.

Foster Wheeler's international presence gives CAPS member dtkhc hope for the company.

High cash reserves, low debt. High presence in Asia. High technical expertise with advancements that keep their equipment viable for producing power even if use of coal is reduced. Beginning joint ventures in co-owning power-producing facilities and is continually looking to make acquisitions that will help increase their technical advantage. Worldwide presence in the power-producing sector.

Beat the Street
While Greenblatt has provided an interesting magic formula, you'll need to read more than a few pages of his book to make your buy or sell decisions. Start your own research on these stocks on Motley Fool CAPS. 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.