These 5 Stocks Have a Little Magic

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 Greenblatt's criteria should give us winning investments that may just produce 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; 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 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 one of these magical companies.

A little bit of pixie dust
On a day when the markets collapsed by triple-digit amounts, fertilizer stocks were even more devastated. The Fertilizer sector tag on CAPS was down almost 5% yesterday, as CF Industries settled 3% lower, while China Green Agriculture (NYSE:CGA) was off 5%. PotashCorp (NYSE:POT) shares tumbled 4%, and Terra Nitrogen sank around 6% on the day.

That's the way it's been for most of the year, with Terra stock lagging the performance of most of its peers. Still, its P/E multiple is just about in line with competitors PotashCorp and Mosaic (NYSE:MOS). Yet, analysts expect Terra's earnings growth to lag behind that of its rivals this year. Whereas the sector is expected to grow profit by 66% on average, Wall Street anticipates just 36% growth for Terra.

Fertilizer companies were supercharged last year in the wake of oil prices spiraling out of control. As consumers were embracing gasoline that hit $4 a gallon, the pursuit of alternative fuels such as ethanol spurred demand for fertilizer to grown corn, and grow it in abundance. Now that oil prices have momentarily relented, we're awash in fertilizer at a higher cost. That's leading to writedowns on supplies and farmers cutting back on fertilizer use.

Investors are still primed for a recovery in the industry, though. CAPS All-Star angusthermopylae finds the same arguments that propelled such stocks higher last year will continue to hold into the future. Terra Nitrogen should profit from such immutable laws of nature:

Maslow's heirarchy of needs: Regardless of what else people want/desire, they need air, water, and food at the very least...and will do whatever it takes to get it. Recovery or now, we have a growing population and a lot of hungry people. Fertilizer is a good bet.

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.