Whether their game is basketball, craps or investing, many people believe the key to winning is to go with the guy with the hot hand. If you are such a believer, consider making a bet on the selection strategies of Joel Greenblatt, managing partner of Gotham Asset Management.
Years ago, I automated the selection criteria of some of Wall Street's most agile players, and now use these programs to pick stocks. Among them, the hot hand currently belongs to my Greenblatt-based strategy.
As you know, the market has been on a tear this year, with the S&P 500 up 16.4% year-to-date. A great performance, no doubt -- but not nearly as impressive as the 33.8% rise in the Greenblatt-based portfolio.
The performance of stock selected by this strategy tends to be volatile. Last year, they climbed 2.4% versus the market's 13.4% gain. In 2009, they rose 63.1% versus the market's uptick of 23.5%. Since I started following it in 2005, the Greenblatt strategy has outperformed the market by nearly three-to-one -- jumping 91.3% for the period, compared with a 31.2% rise in the S&P 500.
The strategy analyzes stocks using only two variables: earnings yield and return on total capital.
Earnings yield -- the amount of debt used to generate earnings -- measures how much return, or yield, you could expect if you bought the entire company, including all debt. Our Greenblatt-based program ranks the earning yield of the thousands of companies in our database.
Return on total capital considers how well a firm uses the capital employed. As it does with earnings yield, our strategy ranks the companies in our database according to their return on total capital.
The last step the strategy takes is to combine the two variables and calculate a final ranking.
Currently, the program is gushing with positive results for Western Refining (WNR). This independent crude oil refiner and marketer operates primarily in the southwestern and western U.S. via refineries it owns in Texas and New Mexico. A wholesale business sells fuels, lubricants and automotive chemicals. In recent years, management has rationalized operations, selling some assets and buying others, and improving overall performance in the process.
Western is ranked sixth in earnings yield among all the stocks in our database; its return on total capital is No. 101; and overall it earns an impressive No. 6 ranking.
Another highlight is AmSurg (AMSG), an owner and operator of more than 235 outpatient surgery centers. The Affordable Care Act and an aging population are boosting the healthcare market's growth, and AmSurg is in a strong position to benefit. AmSurg's earnings yield ranking is No. 41; its return on total capital is No. 46; and its final combined ranking is No. 5.
It is anyone's guess how long a hot-handed player will stay in the "zone." But right now, our Greenblatt-based strategy is outperforming, and its preferences should be on your short list of stocks to buy.