Applying Joel Greenblatt's Magic Formula in Dhaka Stock Exchange

The Magic Formula: A little Background

"Little Book That Still Beats the Market" by Joel Greenblatt which was published in 2006 discussed a "magic" formula. This formula boasted  compound annual returns of around 30.8% per year in the preceding 17 years in the New York Stock Exchange. While it has not maintained returns that high, according to Investopedia, between the years 2003 and 2015, it still made annualized returns of 11.4% which was significantly higher than the 8.7% return from the S&P 500. Thus, the formula kept its promise of beating the market. Now, it is to be noted that this is a long-term investment strategy. To see the expected returns, it is recommended this strategy be followed for around 5 years.

The basic understanding of the formula is very simple. After excluding financial and commodity/utility companies, it ranks all the companies in the stock exchange based on their Earnings Yield and Return on Capital. The top companies in this ranking are the recommended buys under this strategy. Thus, theoretically speaking, this strategy should be effective in any stock exchange.

Ranking DSE Companies Based on the Magic Formula

After excluding companies based on different parameters (discussed in the next sections), I ranked the top 34 companies in the Dhaka Stock Exchange based on this strategy. In the following list I discussed the top 10 stocks according to this formula. Since this strategy is used for long term investments (1 to 5 years), I looked at two major factors when observing these stocks.

• Regular Dividend Disbursement: This is an important factor for long-term investments. Since the shareholders will not be making money selling stocks, dividend income is crucial for them.
• Beta: The beta helps us understand the volatility of the stock compared to the market. The low betas in stocks show that they are comparatively less volatile than the market i.e they are good long term investments.

1. Marico Bangladesh Limited (MARICO)

Marico is currently trading at around BDT 2.3k and has stellar financials. It has a beta of only 0.17. It has been consistently been giving dividends to the shareholders over the past few years and the recent most dividend yield is 4.33.

Marico topping the list gave me a little more belief on this strategy in the DSE.

2. British American Tobacco Bangladesh (BATBC)

BATBC is another very reliable stock in DSE. It is currently trading at around BDT 560 with a beta of 0.81. Like Marico, it has also been giving dividends to the shareholders consistently and has a dividend yield of 4.33.

3. Grameenphone Bangladesh (GP)

While the GP stock has given a negative return of 12.76% over the last year, its strong financials helped it rank third according to the Magic Formula strategy. It is currently trading at around BDT 300 and has a beta of 0.43 which is lower than that of BATBC. It has a dividend yield of 7.15.

4. Renata Limited (RENATA)

I expected to see a number of Pharmaceutical companies in the list but was still curious to see which one did the best. According to this analysis, Renata ranked highest among the Bangladeshi Pharmaceuticals.

The Renata stock which has grown at a rate of 14.15% has been showing great performance. It is currently trading at around BDT 1.3k and has a beta of 0.12. The recent most dividend yield of Renata is 1.1 and it has been giving dividend consistently over the past years.

5. Square Pharmaceuticals Ltd. (SQURPHARMA)

Square Pharmaceuticals is another unsurprising company in this list. It is currently trading at around BDT 218 and has a beta of 0.7. It has a dividend yield 2.78 and has been giving out dividends regularly the past years.

6. Nahee Aluminum Composite Panel Ltd. (NAHEEACP)

This was a company I had absolutely no idea about. Digging in a little, I found out that it is currently trading at around BDT 68. But more interestingly, it saw a growth of 50.56% over the last year which is huge. It has a beta of 1.23 which is significantly higher than the stocks discussed so far. However, high beta is not necessarily a bad thing. Globally, we have seen that technology stocks usually have higher beta since they often give higher returns than the market. However, there is no doubt that this indicates high risk. Just like the other stocks mentioned in this list, this company has also been disbursing dividends regularly and the current dividend yield is 2.25.

If I am being honest, even though it made the ranking, I am a little weary of this stock and would probably not purchase it. Even less so if it's for a long term investment.

7. BBS Cables Ltd. (BBSCABLES)

Another company with a high beta of 1.42 which made it to the top 10 of this ranking is BBS Cables Ltd. It is currently trading at around BDT 56. It has seen a negative growth of 2.21% over the last year. However, it has still been giving out dividends regularly over the past years and has a current dividend yield of 1.58.

8. Genex Infosys Limited (GENEXIL)

Genex Insosys is another company I had no recognition of before I started working on this. It is currently trading at around BDT 86. An interesting statistic about this stock is that while it showed a positive growth of around BDT 3.08% the last year, it saw a negative return of 46% in the last six months. This means, it had a huge bump last year which was followed by a crash. All in all, this does not seem promising for a long-term investment and the beta of 1.33 backs that up. The company was only listed in 2019 but it has been giving dividends consistently since then.

9. Beximco Pharmaceuticals Ltd. (BXPHARMA)

Beximco's low ranking in this list is not exactly surprising. Over the last year, the BXPHARMA stock has given a negative return of 7.93%. It also has a beta of 1.38 which shows it is a fairly volatile company. It has still been giving out regular dividends over the past few years. However, the decrease in price over the last year might, the current low price might be the right time to buy the stock.

10. LafargeHolcim Bangladesh (LHBL) 

LHBL is another stock which has been performing very well over the past year. The stock saw a high positive return of 26.57% over the past year. It has also been giving regular cash dividends in the previous years. However, it has a high beta of 1.56 but that can be due to the fact that it saw high returns against a market which was not doing very well.

The ranking of the remaining 24 companies have been added at the end of the article*.

Identifying Companies to Rank

The first parameter to select companies according the book is to have a minimum market capitalization when selecting companies. Based on that, I first selected the top 150 companies in DSE and removed the Financial and Commodity Companies (electricity/oil/gas) from the list. I was then left with around 130 companies.

Ideally, I wanted to run the formula over these companies and rank them. To find the Earnings Yield, I needed the Earnings Before Interest and Taxes (EBIT) and Enterprise Value (the sum of market capitalization and debt of the company). And for the Return on Capital, I needed the EBIT, Net Fixed Assets and Working Capital. I tried to see if there were an API or if I could scrape a site to get these information but I realized the data was not available at one place. Since it was impossible for me to collect information on 120 companies manually, I decided to further cut down the list.

To cut down the list, I ranked the companies by P/E (Price Earning) ratio and EPS (Earning Per Share) and selected the top 50 companies. From these 50 companies, I found 34 companies which had all the required information to be finally ranked according to the formula.

What now?

From my limited experience, I think it's next to impossible to confidently identify stocks which will be a 100% successful in DSE. This is even more true if we are discussing long-term. Nevertheless, this will definitely be a fun experiment for finance enthusiasts to see if this formula has any effectiveness in the DSE. I plan on updating the list every year as per instructions and record the returns. Hopefully, I shall get a fruitful output and will manage to beat the market. Now will the market itself collapse? Who knows!

*The following section lists the remaining 24 companies according to their rankings:

1. DSSL 
2. BSCCL 
3. ADVENT 
4. SSSTEEL 
5. FORTUNE 
6. BDCOM 
7. ACIFORMULA 
8. HRTEX 
9. PREMIERCEM 
10. ACMELAB 
11. BPPL 
12. AAMRATECH 
13. GPHISPAT 
14. RAKCERAMIC 
15. BSRMSTEEL 
16. ORIONPHARM 
17. EHL 
18. BSC 
19. AL-HAJTEX 
20. MALEKSPIN 
21. EASTRNLUB 
22. SALAMCRST 
23. ACI 
24. BEXIMCO