Greenblatt Sparkles in Growing Retail Industry

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Among consumer cyclical companies that trade on the New York Stock Exchange and the Nasdaq, three retail companies, Bed Bath & Beyond Inc. ( BBBY ), Winmark Corp. ( WINA ) and Hibbett Sports Inc. ( HIBB ) have high Greenblatt earnings yield AA and return on capital . This suggests that these companies have high value potential based on GreenblattAAAs magic formula.

Greenblatt and His AAAMagic FormulaAAA

As mentioned in an earlier article on technology companies, the Greenblatt magic formula ranks company stocks based on earnings yield and Greenblatt return on capital. Developed by Joel Greenblatt ( Trades , Portfolio ), founder of Gotham Asset Management, the magic formula implements GreenblattAAAs investing strategy based on AAAvalue with a catalyst.AAA Greenblatt targets the companies that are undervalued based on normalized earnings.

GreenblattAAAs definitions for the earnings yield and return on capital, as mentioned in The Little Book that Beats the Market, differ from the respective common definitions. Instead of taking the ratio between trailing 12-month EPS and the stock price, Greenblatt takes the companyAAAs EBIT over the enterprise value to find the companyAAAs earnings yield. According to the magic formula investor, this earnings yield likely provides a more accurate profitability measure than the regular earnings yield. Greenblatt also calculates the return on capital using EBIT: to calculate the ROC, Greenblatt divides the companyAAAs EBIT with the sum of the companyAAAs net fixed assets and net working capital.

High Earnings Yield and ROC Results in Increased Value

Currently, NYSE and Nasdaq consumer cyclical companies have a mean Greenblatt earnings yield of 1.23 and a standard deviation of 28.67. Additionally, these companies have a mean Greenblatt ROC of 25.74 with a standard deviation of 238.84. The standard deviations are high, likely due to some outliers: for example, even though Winmark has a regular ROC of just 193.12% as of June 2016, Greenblatt ROC is currently 3248.71%. This suggests that Winmark likely has strong upside value potential in the short-term.

Companies with above-average earnings yield and ROC are likely good investments. Among all consumer cyclical companies, about 23.51% are likely good investments based on their earnings yield and ROC. Winmark is likely a good investment based on the above criterion. Additionally, Winmark has a high profitability rank despite modest financial strength . Even though the company has relatively low interest coverage and cash to debt ratios, the franchiser of retail merchandise firm has a Piotroski F-score of 8, suggesting a strong business operation.

Even though Bed Bath & Beyond and Hibbett Sports currently have a lower ROC compared to their median ROC, these companies are currently the top two U.S. consumer cyclical stocks listed on the Magic Formula Screener . This is likely because these companies have a lower P/E ratio compared to their 10-year EBITDA growth rate . With a P/E ratio of just 8.89 and a 10-year EBITDA growth rate of 13.9, Bed Bath & Beyond is likely undervalued based on its normalized earnings. Additionally, BBBYAAAs P/E ratio is also lower than its five-year EBITDA growth rate of

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: BBBY , WINA , HIBB

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