At Validea , however, we have built our stock screening strategies on fundamental analyses employed by some of the most successful market gurus. One such guru is money manager Joel Greenblatt , who, in , published The Little Book that Beats the Market , a concise guide that illustrates how investors can earn market-beating returns using what he calls a "magic formula. The formula comprises two variables: Greenblatt thinks that ROC allows an investor to see how a company best uses its assets to generate earnings.

Buffett and Peter Lynch, Greenblatt's criterion is based on earnings before interest and taxes so that debt service and tax liabilities don't cloud how well a company is doing. In addition, instead of using only total assets in his calculation, Greenblatt uses total capital -- which includes working capital and net fixed assets-- to isolate how much capital a firm needs to operate. He focuses on earnings yield in an effort to find strong stocks selling at bargain prices.

Again, Greenblatt uses EBIT in this formula and divides by total enterprise value , which is defined as market value, plus interest-bearing debt to determine how much debt is used to generate earnings.

His approach can be boiled down to a simple and sensible notion: His "magic formula," however, shouldn't be confused with a magic bullet. Although his user-friendly, straightforward approach has produced impressive, back-tested returns of But, if one considers this guru's fundamental investment philosophy, such varied performance wouldn't cause concern. Greenblatt would say that he isn't looking for returns in the short term and that down months or even years don't worry him. If everyone used it, it would probably stop working" because the demand for those stocks would push up prices, he said.

In fact, the strategy upon which Greenblatt built his formula actually under-performed the market on average in five of every 12 months over the course of his total year study. The challenge with this investment approach is in being disciplined enough to stick with it. During periods when shares lag the market, most investors bail in favor of the latest "hot" stock or strategy. Unfortunately, investors who chase performance often end up with overpriced under-performers.

Those who have the foresight to stick with the Greenblatt strategy through short-term pain, however, can reap rewards. Because the approach looks for stocks selling on the cheap, those who use it will likely need to invest in companies that are getting bad press because of industry fears or short-term problems, which can be scary as an investor.

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But doing so can also mean uncovering significant opportunities because when market expectations are extremely low, any improvement in a company's operations can translate quickly into healthy gains. The Greenblatt model ranks this company within the top five in the database, given its earnings yield of Here are Tuesday's top research calls, including an upgrade of AIG, downgrade of Valero and new coverage for Kroger, Whole Foods Markets and Sysco.

From insurers to industrials, these stocks look hot. It's a wonder to me how split this market really is. Everyone knows or should know that there is no way to time the market or guarantee gains. Since , Validea's Earnings Yield portfolio based on the Greenblatt model has returned The company's stock has an earnings yield of Herbalife has been under a lot of scrutiny over the past year, with renowned investor Bill Ackman taking a big short position in it.

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But the Greenblatt screen thinks that the firm's numbers speak for themselves: The stock gets high marks from the Greenblatt model, based on its Action Alerts PLUS is a registered trademark of TheStreet, Inc. You are using an outdated browser. Please upgrade your browser to improve your experience.

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May 16, Analysts' Actions -- AIG, Kroger, Sysco, Whole Foods, Valero and More Here are Tuesday's top research calls, including an upgrade of AIG, downgrade of Valero and new coverage for Kroger, Whole Foods Markets and Sysco. May 16, 8: These Sectors Look Bullish Part II From insurers to industrials, these stocks look hot. May 9, 7: There Are Powerful Themes in Several Bull Markets It's a wonder to me how split this market really is.

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