Slightly over two years ago on 7 January 2015, I wrote and published an article titled The Best Shares in Singapore’s Stock Market. The article marked the start of an experiment I wanted to conduct using the Magic Formula, an investing strategy described in the 2005 book by the super investor Joel Greenblatt, The Little Book That Beats The Market.
Here’s how I described the Magic Formula in my article:
“The formula works by first ranking all shares (excluding financials and utilities because of their unique financial structure) on their returns on invested capital. Each share is given a score based on their rank. Then, all shares (again excluding financials and utilities) are ranked on their earnings yield and given a score based on that. Both scores are then added up.
A portfolio of the lowest-scored shares would be held for a year before the ranking exercise is done again and a new portfolio is constructed based on the shares with the lowest scores at the time the latest ranking exercise is done. This would go on every year. Rinse and repeat.
Greenblatt’s idea behind the Magic Formula is deceptively simple but it works on solid investment footing – he wants to buy the best quality shares (the ones with the highest return on invested capital) at the lowest possible price (the ones with the highest earnings yield). That’s a strong recipe for success.
By constructing a 30-stock portfolio of the shares with the lowest scores and back-testing the results from 1988 to 2004, Greenblatt showed that his Magic Formula approach generated annualised returns of 30.8% compared to the S&P 500’s 12.4% annual gain. The S&P 500 is a broad market index in the U.S. which is akin to the Straits Times Index (SGX: ^STI) here in Singapore.”
In The Best Shares in Singapore’s Stock Market, I had picked 30 stocks from Singapore’s stock market based on the Magic Formula and built a hypothetical portfolio. As you can see from the excerpt above, the Magic Formula requires a yearly refresh. And so, on 7 January 2016, exactly a year after The Best Shares in Singapore’s Stock Market was published, I built another portfolio of 30 stocks using Greenblatt’s investing strategy. I documented this in the article The 30 Best Stocks In Singapore For 2016.
It turns out that the 2015 Magic Formula portfolio delivered a loss of 14.3% while the 2016 portfolio managed to gain 16.6%. You can find a more detailed set of results for the 2015 and 2016 portfolios and the lessons I drew from them in the links directly below:
I want to continue the Magic Formula experiment as I want to see whether Greenblatt’s investing strategy can work here in Singapore over the long-term, hence the birth of this article you’re reading now.
Without further ado, here are the five best stocks in my new list of 30 in descending order (I had excluded all financial and utility stocks as well as those with a market capitalisation of less than S$100 million; these had been done previously too):
- Sinostar PEC Holdings Limited (SGX: C9Q)
- T T J Holdings Ltd (SGX: K1Q)
- Yuuzoo Corporation Ltd (SGX: AFC)
- Sing Holdings Limited (SGX: 5IC)
- Valuetronics Holdings Limited (SGX: BN2)
The table below shows all the 30 stocks in my new list:
Source: S&P Global Market Intelligence (data as of 5 January 2017)
According to the Magic Formula, they are Singapore’s best stocks. I’ve no idea which of them would turn out to be the big winners of 2017. But, I guess we’d find out a year from now! Don’t go away!
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Straco Corporation.