Acquirer's Multiple + The Magic Formula + Avi

The Acquirer's Multiple vs The Magic Formula: The Acquirer's Multiple (AM) compares the total cost of a business to its operating income or enterprise value divided by operating earnings, while The Magic Formula (MF) looks for high earnings yield relative to enterprise value and a high return on capital. The AM has been shown to outperform the MF in long-term testing. Beat the Market with the Acquirer's Multiple: The AM has been shown to beat the market in testing, with a 26% return compared to the market's 9%. The MF did slightly better than the market with a 22% return. What is the formula for Acquirer's Multiple?: Enterprise Value = market cap plus debt plus preferred stock plus minority interest minus cash. The Acquirer's Multiple compares this total cost to the operating income or enterprise value divided by operating earnings. What is the Magic Formula for valuation?: The long-term Magic Formula Valuation = 8-year average earnings before interest and taxes (EBIT)) to total enterprise value (TEV). Quality = 8-year average EBIT to net property plant and equipment (NPPE) plus net working capital. The Magic Formula approach: The Magic Formula strategy focuses on two key financial metrics to identify fairly priced stocks with high growth potential: return on capital (ROIC) and earnings yield (EY). Magic formula/Acquirer's multiple in 2021: The Magic Formula ranks companies based on having a high Return on Capital and Earning yield. The AM looks for just high earnings yield relative to enterprise value while the MF looks for both high earnings yield relative to enterprise value and a high return on capital. Videos: There are several videos available on YouTube that discuss the differences between the AM and MF, as well as their respective investment strategies. Implementation of Magic Formula and Acquirer's Multiple: A study proposed using the Magic Formula and Acquirer's Multiple as an investment strategy for new investors in Indonesia. Both strategies were found to be effective in generating returns. The Magic Formula: An investment strategy popularized by Joel Greenblatt in his book 'The Little Book That Beats the Market.' The strategy involves selecting stocks based on two fundamental factors: earnings yield and return on invested capital (ROIC). The Acquirer's Multiple: A valuation metric developed by Tobias Carlisle in his book 'Deep Value.' This approach focuses on identifying companies that are trading at a low multiple of their earnings based on enterprise value, rather than just focusing on market capitalization. Key Differences: The Magic Formula screens for both value and quality, while the Acquirer's Multiple only screens for value. The Magic Formula is typically implemented using a buy-and-hold approach, while the Acquirer's Multiple is often used for a more active trading strategy. Potential Gains: The Magic Formula may be more likely to identify stocks that are both undervalued and have good long-term prospects. The Acquirer's Multiple can identify stocks that are likely to be acquired by other companies, which can lead to short-term price appreciation. Qualitative Factors: Both strategies are quantitative and do not take into account qualitative factors such as management quality or competitive landscape. There is no guarantee that either strategy will outperform the market over the long term.

by Soham Malhari