In this article, we will discuss value investor Joel Greenblatt’s portfolio, hedge fund returns, and his Magic Formula. You can skip our detailed analysis of Greenblatt’s investment philosophy and his hedge fund’s performance over the years, and go directly to read Joel Greenblatt's Top 5 Stock Picks.
Joel Greenblatt, renowned for his expertise in value investing, holds a prominent position among Wall Street's notable investors. In 1985, he established Gotham Capital, a venture that yielded an impressive annualized return of 50% from 1985 to 1994. Recognizing the need for progression, Greenblatt founded Gotham Asset Management in 2008 as a successor to his previous fund. Presently, he assumes the role of Managing Principle and Co-Chief Investment Officer.
Greenblatt is most famous for creating the “Magic Formula," a systematic methodology that can be used to find and identify value stocks with growth potential. The Magic Formula, as explained by Joel Greenblatt in his book The Little Book that Beats the Market, involves ranking stocks based on two metrics: earnings yield (EBIT/enterprise value) and return on capital (EBIT/invested capital). Greenblatt’s approach to investing can be called a combination of value investing and quality investing. It’s all about buying a high-quality company at an attractive price. Or, viewed from a different angle, buying a cheap company that isn’t a waste. As Greenblatt stated in a 2006 interview with Barron's, the Magic Formula is designed to help investors with “buying good companies, on average, at cheap prices, on average.”
However, investors should take note that the Magic Formula is not the Holy Grail of investing. It does not guarantee success, and as with any other strategy, it does involve some level of risk. The strategy relies on historical data and may not perform as well in the future, especially if market conditions were to change. During a backtest conducted to analyze market performance from 2003 to 2015, it was discovered that the Magic Formula strategy yielded annualized returns of 11.4%. In comparison, the S&P 500 achieved returns of 8.7%. The author of the backtest observed that while the magic formula strategy did outperform the benchmark, it fell short of the exaggerated claims made in the Little Book.
Incidentally, Joel Greenblatt’s investment technique seems to have caused his hedge fund to lag behind the broader market. Over the past 5 years, Gotham Large Value Fund (GVALX) has gained only 9.15%, compared with a 12.31% return of the S&P 500.
At the close of Q1 2023, Gotham Asset Management's portfolio value surpassed $4.125 billion, marking an increase from the previous quarter's $3.5 billion. The fund maintains a diverse investment strategy, with technology, services, healthcare, and finance sectors occupying significant positions within the portfolio. Noteworthy holdings of Greenblatt in Q1 include Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL). This article will further delve into Joel Greenblatt's top 10 stock holdings, highlighting his preferred selections.
Joel Greenblatt's Return, Portfolio and Magic Formula
Joel Greenblatt of Gotham Asset Management
Our Methodology
To make our list of the top stock picks of Joel Greenblatt's Gotham Asset Management for the first quarter of 2023, we took a look at its latest filings with the SEC and picked the 10 investments that the investment fund held the highest stakes in.
Gotham Asset Management Q1 2023 Stake: $18.23 million
Merck & Co., Inc. (NYSE:MRK) is an American multinational pharmaceutical company headquartered in Rahway, New Jersey, and is named for Merck Group, founded in Germany in 1668, of whom it was once the American arm. The company does business as Merck Sharp & Dohme or MSD outside the United States and Canada. A leading pharmaceutical firm, Merck is known for developing medicines, vaccines, biologic therapies, and animal health products. The company's operations are managed on a products basis that includes two operating segments: the pharmaceutical and animal health segments. On May 23, Merck & Co., Inc. (NYSE:MRK) declared a $0.73 per share quarterly dividend, in line with previous. The dividend was payable on July 10, to shareholders of record on June 15.
Gotham Asset Management initiated its position in Merck & Co., Inc. (NYSE:MRK) more than a decade ago during the first quarter of 2011, at an average quarterly share price $31.90. Currently, the company represents 0.44% of Joel Greenblatt's portfolio.
Insider Monkey dug through 943 hedge funds for their first quarter of 2023 investments to discover that 75 had invested in Merck & Co., Inc. (NYSE:MRK). Ken Fisher’s Fisher Asset Management is the biggest shareholder, owning a $1.3 billion stake.
“Founded in 1891 and headquartered in New Jersey, Merck & Co., Inc. (NYSE:MRK) is one the world’s largest pharmaceutical firms. The company’s drugs are used to treat conditions in a variety of areas, including oncology (~38% of revenue), vaccines (~19%), diabetes (~11%), animal health (~11%) and other (~21%). Merck produced over $48 billion in sales in 2021, just under half of which were generated in the United States. Within oncology, the firm’s immuno-oncology platform is becoming a major contributor to overall sales, driven by the blockbuster1 drug Keytruda. The company’s vaccine business is also significant and includes Gardasil for the prevention of HPV (the disease that can lead to cervical cancer in women), as well as vaccines for hepatitis B, pediatric diseases and shingles. In recent years, Merck has been shifting its focus toward unmet medical needs in specialty-care areas. As part of this shift in focus, in June 2021, Merck received $9 billion from the spinoff of its women’s health, established brands, and biosimilars businesses into the now independent, publicly traded company Organon…” (Click here to read the full text)
Similar to Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL), Gotham Asset Management holds considerable confidence in Merck & Co., Inc. (NYSE:MRK).
Gotham Asset Management Q1 2023 Stake: $18.49 million
Pfizer Inc. (NYSE:PFE) is an American multinational pharmaceutical and biotechnology corporation headquartered at The Spiral in Manhattan, New York City. Established in 1849 by two German entrepreneurs, Charles Pfizer and Charles F. Erhart, it is renowned for developing and producing medicines and vaccines for immunology, oncology, cardiology, endocrinology, and neurology. In 2022, Pfizer Inc. (NYSE:PFE)'s top product was COVID-19 vaccine Comirnaty, generating 37.8 billion U.S. dollars in alliance revenues and direct sales. The biotech company has been raising its dividends consistently for the past 13 years. It currently pays a quarterly dividend of $0.41 per share and has a dividend yield of 4.60%, as of July 11.
Pfizer Inc. (NYSE:PFE) was Joel Greenblatt's largest biotech position given Gotham Asset Management's stake value of over $18.49 million at the end of March 2023.
At the end of March 2023, 73 hedge funds tracked by Insider Monkey owned stakes in Pfizer Inc. (NYSE:PFE), worth collectively roughly $2.2 billion. Of these, Cliff Asness' AQR Capital Management is the largest shareholder, with total stakes worth approximately $380.28 million.
Gotham Asset Management Q1 2023 Stake: $19.91 million
The largest direct descendant of John D. Rockefeller's Standard Oil, Exxon Mobil Corporation (NYSE:XOM) has undergone a remarkable transformation over the past 140 years. What began as a localized distributor of kerosene in the United States has grown into a global powerhouse, ranking among the largest publicly traded companies in the petroleum and petrochemical industries. Exxon Mobil Corporation (NYSE:XOM) has gained about 29% over the past five years and the company has upped its dividends for 39 straight years. Currently, the oil and gas corporation pays a quarterly dividend amount of $0.91 with a yield rate of 3.48%.
Gotham Asset Management raised its position in Exxon Mobil Corporation (NYSE:XOM) by 30% to end the first quarter of 2023 with a stake of over $19.91 million in the petrochemical giant.
73 of the 943 hedge funds part of Insider Monkey’s database had bought the firm’s shares as of Q1 2023. Exxon Mobil Corporation (NYSE:XOM)’s biggest investor in our database is Rajiv Jain’s GQG Partners with an investment of $2.1 billion.
Gotham Asset Management Q1 2023 Stake: $25.64 million
Meta Platforms, Inc. (NASDAQ:META) stands as a thriving social media corporation, boasting an impressive user base of 3 billion monthly active users. Through its adept utilization of user data and analytics, the company has achieved remarkable success in delivering personalized experiences and driving profitability through targeted advertising. In the year 2022, Meta Platforms, Inc. (NASDAQ:META) recorded a staggering revenue of $116 billion, accompanied by a net income of $23.2 billion. On July 5, Meta platforms, Inc. (NASDAQ:META) officially launched Threads, its text-based rival to Elon Musk's Twitter. Despite a delayed EU launch, the app had racked up more than 30 million sign-ups within about 18 hours of its launch.
Meta Platforms, Inc. (NASDAQ:META) is among the top 10 biggest positions for Joel Greenblatt's 13F equity portfolio at the end of Q1 2023 given his hedge fund’s stake of over $25.64 million in the social media giant.
According to Insider Monkey’s first quarter database, 220 hedge funds were long Meta Platforms, Inc. (NASDAQ:META), compared to 194 funds in the prior quarter. Billionaire Philippe Laffont’s Coatue Management is one of the largest stakeholders of the company, with a position worth $1.70 billion.
Harding Loevner Global Equity Strategy made the following comment about Meta Platforms, Inc. (NASDAQ:META) in its Q1 2023 investor letter:
“The losses from SVB and First Republic were significantly mitigated, though not fully offset, by a rebound in shares of growth companies, which contributed to outperformance among our Communication Services and IT holdings. Our biggest relative contributor was Meta Platforms, Inc. (NASDAQ:META), the parent of Facebook, which pledged to boost efficiency through layoffs and a hiring freeze.”
Gotham Asset Management Q1 2023 Stake: $27.48 million
Berkshire Hathaway Inc. (NYSE:BRK-A) is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from which it invests the float in a broad portfolio of subsidiaries, equity positions and other securities. Led by the iconic Warren Buffett, the firm has strategically built a diversified investment portfolio encompassing various industries including consumer discretionary, consumer electronics, banking, finance, and energy. Joel Greenblatt's reduced its shares in Berkshire Hathaway Inc. (NYSE:BRK-A) by 11% in Q1 to end March with a position worth almost $27.48 million.
As of the first quarter of 2023, 108 of the 943 hedge funds surveyed by Insider Monkey had invested in the investor of investors. Berkshire Hathaway Inc. (NYSE:BRK-A)’s largest hedge fund shareholder proved to be the Bill & Melinda Gates Foundation Trust, which held $6.08 billion worth of shares.
Berkshire Hathaway Inc. (NYSE:BRK-A) ranks among the likes of Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL) as a top stock in Joel Greenblatt's portfolio.
