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 opportunity for investors. They now had in their hands insights into investing strategies that a value investing master himself had 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 shares of undervalued, high-performing companies and hold them 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 Greenblatt suggests, we should be able to find winning investments that may just produce some outsized returns.

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

Sources: 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 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 one of these magical companies.

A little bit of pixie dust
Comparisons of Universal Travel with Ctrip.com (NASDAQ:CTRP) are natural, since both it and Universal are China-based travel service providers offering packaged tours, air ticketing, and hotel reservation services. But there might be more for investors to consider than the company’s engagement in a growth business in the burgeoning Chinese market.

A couple of strategic business decisions and an upcoming inclusion in a host of market indexes could provide a catalyst for Universal Travel's shares to jump. At the end of March, it effected a 3-for-1 reverse stock split, which helped boost shares from their penny-stock level and allowed the company to apply for membership to a senior exchange. It now trades on the New York Stock Exchange's AMEX bourse.

Fools know that stock splits, reverse or otherwise, mean little by themselves -- although reverse splits are typically used by companies in dire financial straits. Universal Travel, though, has turned in some solid earnings recently.

Profits more than doubled on a 72% increase in revenues as the Chinese government's stimulus plan gained traction, along with better weather and the announcement of a new three-day "April tomb-sweeping" holiday. Universal Travel is also selling its air cargo logistics business so that it can concentrate its efforts on its core domestic travel business.

Say hello to index funds
Further, at the end of this month, Universal Travel will be added to a number of Russell indexes, which by itself might cause a temporary jump in its stock as institutional investors that track index performance are required to buy shares.

Yet investors might want to consider Universal Travel on its own merits. At just a fraction of Ctrip's $2.7 billion market valuation, it stands up nicely on the basis of earnings and sales multiples, as well as prospects for future earnings growth. Although comparisons could be made to Priceline.com (NASDAQ:PCLN), Expedia, Orbitz, and Travelzoo, its focus on the Chinese markets makes a side-by-side matchup against Ctrip and eLong more relevant -- and by many measures, Universal Travel comes out ahead.

It's that ability to stand next to those rivals that is attracting investors like CAPS member egarl, who says: “Fast growing travel company in China. Growing faster than CTRP and eps is similar at 1/3 of the price.”

Universal Travel has outpaced the other 11 stocks in the CAPS Travel Services sector by orders of magnitude. Shares of the growing travel company are up nearly 50% over the past month (and up more than 223% year to date), compared to the 6% increase across the sector since late May.

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.