5 Stocks With 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. Suddenly, investors had access to investing strategies that a value investing master used and that could be easily replicated. Greenblatt has achieved phenomenal results over the past two decades -- he's beaten even Warren Buffett's performance.

His 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 criteria he lays out for pre-tax earnings and return on capital, but it also adds the ratings from our Motley Fool CAPS investor-intelligence database. Combining those rankings with Greenblatt's standards should give us winning investments that may just produce some outsized returns.

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

Stock	Pre-Tax Earnings Yield %	Pre-Tax Return on Capital %	Recent Stock Price	CAPS Rating (Out of 5)
Adaptec (Nasdaq: ADPT)	28%	>100%	$2.69	***
China Sky One Medical (Nasdaq: CSKI)	21%	>100%	$14.68	****
NutriSystem (Nasdaq: NTRI)	23%	>100%	$13.88	***
Primus Guaranty (NYSE: PRS)	67%	>100%	$2.50	****
Time Warner (NYSE: TWX)	22%	>100%	$23.00	**

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS. Pre-tax earnings yield is inverse of EV/EBIT. Pre-tax ROC is EBIT divided by tangible capital employed.

Don't consider this 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
Easy come, easy go. Bringing to a close the eight year-long saga of trying to create a new-media giant, the anchor that was AOL is finally being untethered from Time Warner. Sometimes, one plus one just doesn't equal two. It ends up becoming much, much less.

Time Warner purchased AOL for $147 billion, and only a year after the deal was completed, shareholders ended up having to eat some $100 billion in writeoffs. The service has occasionally enjoyed some hits -- AOL welcomes 107 million unique visitors every month, while AOL Mail saw a 31% increase in traffic last year, and AOL Music has continued to be a draw -- but membership in the service continues to dwindle, partially by design.

By year's end, though, Time Warner will spin off AOL to trade as a separate entity, after it purchases back the 5% stake Google (Nasdaq: GOOG) has in the Internet portal.

The remaining media giant, however, will still be a formidable business to contend with. It owns both the CNN and HBO networks, as well as the Warner Brothers movie studio. It's that latter asset, with its deep cast of characters to exploit, that has some investors believing it will be able to grow smartly from here.

Like Marvel (NYSE: MVL) and Universal Studios, which have been churning out movies based on Marvel's stable of comic book heroes, Time Warner has its own DC Comics heroes, and CAPS member SneakyFerry says it would be a good idea to delve further into the roster.

Warner (DC) has a deep well of big-screen characters from which to draw. Marvel has shown that there are big bucks to be made in turning comic heroes into movie giants -- Spider-Man, X-Men, Iron Man, etc. TWX, however, has been slow to the game. Batman, Superman, Watchmen -- nice, but ya know. ... However, there are plenty more characters who could use some Hollywood treatment. Warner appears to be waking up to the possibility. (A Green Arrow film? Green Lantern? Justice League?) Also, filmmakers are learning how to make these movies well -- attracting huge audiences and dollars. (The Dark Knight, for example -- or Marvel's Iron Man, which took a not-quite-A-list character and made him into a box-office smash.) Over coming years, TWX should enjoy a lift from superhero movies. If they don't, they're missing a golden opportunity.

Of course, an AOL spinoff -- a seemingly destitute business on the verge of failure -- brings to mind another Joel Greenblatt investing classic, You Can Be a Stock Market Genius, which focused on such special situations.

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 you're 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.