Adding ADBE, DECK, EVER to the Magic Formula Portfolio - Round 7
The Magic isn't working yet, but I'm sticking to the process
Welcome back!
I’m at Round 7 of constructing my Magic Formula Portfolio.
Here is the 2-minute AI version of today’s post if you’re short on time
As a reminder, while studying investing masters, I’m creating two real-money portfolios to put my learnings into practice.
Last week’s Guru deep-dive got quite a few views and likes, so make sure to check it out if you haven’t yet:
And if you are new to Guru Gems, start here.
Quick refresh on the Magic Formula
In his book “The Little Book that (Still) Beats the Market”, Joel Greenblatt suggests that a regular investor can beat the market averages by buying a group of ‘good’ companies at ‘bargain’ prices.
‘Good’ → high return on capital
‘Bargain’ → high earnings yield
Since he expects the magic formula to work on average, Greenblatt suggests to own a basket of 20-30 stocks, so you wouldn’t have to worry about a few bad purchases or having to analyze individual stocks in detail.
He also suggests to buy this basket over the course of a year or so, meaning buying a few stocks every month or every other month, which is exactly what I am doing.
You can read more on Joel Greenblatt and his Magic Formula here.
You can also download my Joel Greenblatt e-book for free:
Current Magic Portfolio performance
The overall performance of the Magic Portfolio is currently -4.9%, and on a YTD basis the loss is even higher.
5 stocks (SIGA, CROX, HRMY, RIGL, HALO) went down 20% or more just over the last month.
Not exactly what I was expecting when starting this portfolio…
But I’m not giving up just yet.
Greenblatt originally tested his formula over a 17-year period and found that the formula had underperformed the market averages for some one-year periods and two-year periods (“which is why people will not stick with the formula”, according to Greenblatt)
So I just have to stick to the process for now…
If you enjoy this newsletter, please help others discover it by clicking 🤍
New Magic Formula Stocks
As I explain in detail in my first Magic Portfolio post, I use Joel Greenblatt’s Magic Formula screener combined with financial ratios data to identify the top stocks in terms of combined rank for Return on Capital (using ROCE) and Earnings Yield (using EV/EBIT).
Here are the 3 companies I will be adding to the Magic Portfolio on Monday:
1. Adobe Inc (ADBE, Market cap $102B)
Adobe is one of the world’s leading software companies, best known for its Creative Cloud suite (Photoshop, Illustrator, Premiere Pro), its Document Cloud (Acrobat, PDF tools), and its growing Experience Cloud for digital marketing and analytics.
Adobe ranks strongly on the Magic Formula with a ROCE of 46% (3yr average of 41%) and an EV/EBIT of 12.3x.
While the EV/EBIT is higher than most other names in the portfolio, the quality of the business more than justifies its inclusion. Very few companies sustain ROCE above 40% over multiple years.
A few things worth noting:
Adobe has faced investor concern over the potential AI disruption to its creative tools business, which has driven the stock down significantly from its highs and created what the Magic Formula identifies as an attractive entry point
Despite strong Q1 FY26 earnings, the stock fell significantly earlier this week as the CEO is stepping down, which created further uncertainty
Despite AI fears, Adobe has been integrating AI deeply into its own products through Firefly and Sensei, and its subscription revenue base remains highly sticky
At a market cap of approximately $100B, Adobe would be by far the largest company in my Magic Portfolio. Adding some large-cap, high-quality counterweight to what has otherwise been a small and mid-cap focused portfolio is probably not a bad thing
Finally, Michael Burry initiated a small position in Adobe as he believes it is now trading at a very attractive valuation
Here are a few deep-dives I would recommend to learn more about the investment thesis for Adobe:
The Intrinsic Value Newsletter - Adobe: Designing a Creative Empire? (May 2025)
Jimmy Investor - Investment Thesis: Adobe, Inc. ($ADBE) (Jan 2026)
The Pursuit of Compounding - The Adobe Investors Paradox: Narrative vs. Numbers (Jan 2026)
2. Deckers Outdoor Corporation (DECK, Market cap $14B)
Deckers is an American footwear and apparel company behind some well-known shoe brands, including UGG, HOKA, Teva, and Sanuk.
DECK ranks near the top of the Magic Formula ranking with a ROCE of 44% (3yr average of 44.8%) and an EV/EBIT of 9.8x, giving it a rare combination of high, consistent capital efficiency and a reasonable valuation for a company of this quality.
A few things stand out about Deckers:
HOKA has been one of the fastest-growing performance footwear brands in the world, with strong momentum in running and outdoor categories
Despite the stock being down 54% (!!) from its Jan 2025 high, the underlying business continues to generate exceptional returns on capital
The 3yr average ROCE of 44.8% shows this is not a one-year fluke, the business has been consistently excellent
Chris Bloomstran (Semper Augustus), a value investor I covered in my Berkshire post last year, significantly increased his DECK position in Q4. Here is what he wrote in his 2025 Letter:
“We likewise added another new company, Deckers Outdoor, to the portfolio in 2025, gradually at first and then suddenly. The company’s shares were the fourth worst performing S&P 500 component of the year, down 49%. Buying initially near the low, and then meaningfully nearly at the low, our sizable investment earned us a positive 5.6% for the year.”
David Einhorn (Greenlight Capital) also started a small position in DECK during Q4 2025.
It’s great to see Gurus buying the stock, this makes me even more confident to add it to the portfolio.
3. EverQuote Inc (EVER, Market cap $580M)
EverQuote operates one of the largest online insurance marketplaces in the U.S., connecting consumers shopping for auto, home, life, and health insurance with carriers and agents through its data-driven platform.
EVER ranks well on the Magic Formula with a ROCE of 35% and a very attractive EV/EBIT of 6.2x, making it one of the cheapest value propositions on the screener this round.
A few things worth noting:
EverQuote’s marketplace model is asset-light and highly scalable. It doesn’t underwrite insurance itself but instead earns referral and advertising revenue, which drives strong returns on capital
The insurance advertising market has recovered meaningfully after a difficult period in 2022-2023 when rising claims costs caused carriers to pull back on marketing spend
With a market cap of approximately $580M, this is a small-cap name that could benefit from the broader small-cap valuation recovery I have been anticipating across the portfolio
I asked Claude.ai to generate an equity research report on the stock and it is giving it a ‘BUY’ recommendation as well:
On Monday, I’m adding these 3 names to the Magic Formula Portfolio and I will hold them for one year, as Greenblatt prescribes.
That will bring me to 21 stocks in the portfolio. The goal is to get to a full portfolio of ~25 names, so I’m getting very close to being fully invested.
And once built, I’ll let the magic unfold…
“If you are able to stick with the magic formula strategy through good periods and bad, you will handily beat the market averages over time”
— Joel Greenblatt
That’s it for this week! Please like or share if you enjoy reading Guru Gems.
You can follow me on X @guru_gems and Substack @gurugems for more insights.
Until next week!