Adding LULU, EXEL, MAX to the Magic Formula Portfolio - Round 8
The Magic Formula Portfolio is back in the green!
Welcome to Round 8 of building my Magic Formula Portfolio.
Here is the 2-minute AI audio version of today’s update:
Quick reminder if you are new to Guru Gems: while studying investing masters, I’m creating two real-money portfolios to put my learnings into practice.
Check out my recent 1-year anniversary post to learn more about my journey:
Last week’s Guru deep-dive covered a lesser-known Guru, who happens to be not only a brilliant investor but also a great thinker
Magic Formula Refresh
In “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.
Here is a great clip from an interview with Howard Marks where Greenblatt talks about how buying good businesses at attractive prices is the key to beating the market. His “Magic Formula” investing strategy is built on this very principle of simplicity and consistency.
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
Last month I added Adobe (ADBE), Deckers Outdoor (DECK), and EverQuote (EVER) to the portfolio in Round 7, bringing the total number of holdings to 21 stocks.
The overall performance of the Magic Portfolio is currently +1.4%, which is definitely not beating the index (yet), but it is back in the green after some painful months.
A few big ‘winners’ were responsible for most of the gains over the past month:
Molina Healthcare (MOH) is up nearly 25% over the past month and jumped 14% on Thursday alone after reporting Q1 2026 earnings. Molina’s solid quarter was driven by better than expected Adjusted EPS ($2.35) and medical loss ratio.
Catalyst Pharmaceuticals (CPRX), a name I added in August, was also up ~15% over the past month and hit a new all-time-high this week. The big ‘catalyst’ here was the company securing extended U.S. patent exclusivity for Firdapse until 2035, which removes the most pressing near-term overhang on the stock.
Crocs (CROX), the ‘ugly’ shoe company, is up nearly 30% over the past month. Crocs received multiple analyst upgrades after their strong 2025 earnings report in February, which has probably boosted investor confidence in Crocs’ growth potential. Some recent product collaborations with popular brands also generated significant social media buzz among younger consumers. The next test will be the Q1 2026 earnings report on April 30.
Of course, not everything has been working. SIGA Technologies (SIGA) and Rigel Pharmaceuticals (RIGL), 2 small-cap pharma companies are down more than 30% and H&R Block (HRB) is even down 40%.
But that’s why Greenblatt says to hold 20-30 stocks, so that the formula can work ‘on average’. And with the portfolio containing many out-of-favor businesses where sentiment is washed out, it usually doesn’t take much in terms of positive catalyst to drive a sharp re-rating.
Also, Greenblatt himself warned that:
Over one-year periods, the magic formula stock portfolios underperformed the market averages in one out of every four years tested.
The real test is over a 3-year period, where Greenblatt observed outperformance in every single rolling 3-year window in his original tests. I am only ~10 months in, so there’s still a long way to go. Sticking to the process!
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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. lululemon athletica (LULU, Market cap $16B)
Magic Formula metrics: ROCE 3Yr: 44%; EV/EBIT: 7.4x
Lululemon is a global athletic apparel company best known for its premium yoga, running, and training wear. The brand built its reputation through community-driven retail experiences and product innovation, and it has expanded internationally over the past decade, particularly in China.
LULU ranks quite high on the Magic Formula screener with a 3yr ROCE of 44% and an EV/EBIT of 7.4x. That combination of consistently high returns on capital with a single-digit EV/EBIT multiple is rare for a brand of this size and quality.
Here is a really good deep-dive from January from The Pursuit of Compounding, who I highly recommend following/subscribing to:
A few things stand out about Lululemon today:
The stock is down ~58% from its 52-week high of $340 (June 2025), and ~32% year-to-date. The decline has been driven by slowing growth in the Americas, a Texas AG investigation around product chemicals, and most recently a sharp 13% drop on April 23 after the company appointed former Nike executive Heidi O’Neill as new CEO. The choice for O’Neill was a disappointment for activist investors Elliott Management.
Despite the noise, the underlying business still generates $11B in annual revenue with strong international momentum (China, EMEA).
The current P/E of ~10.8x is well below LULU’s 5-year median of ~37x, suggesting the market is pricing in a lot of bad news.
I realize LULU is a controversial pick and may be considered a value trap. But the Magic Formula doesn’t ask whether a story is comfortable, it asks whether the business is high-quality and cheap. On those two dimensions, LULU is hard to ignore.
2. Exelixis (EXEL, Market cap $12B)
Magic Formula metrics: ROCE 3Yr: 26%; EV/EBIT: 11.5x
Exelixis is an oncology company best known for CABOMETYX (cabozantinib), a tyrosine kinase inhibitor approved across multiple indications, including renal cell carcinoma, hepatocellular carcinoma, and most recently neuroendocrine tumors.
EXEL ranks strongly on the Magic Formula with a ROCE of 36% (3-year average of 26%) and an EV/EBIT of 11.5x.
A few things to note about Exelixis:
The company generated $2.1B in revenue in 2025 (up 17%) and guided for ~$2.4B in 2026, driven by continued momentum in renal cell carcinoma and the new NET launch.
The market is clearly pricing in the August 2026 patent cliff for cabozantinib, which currently accounts for ~90% of revenue which explains the relatively low valuation.
The company has been aggressively returning capital to shareholders, having repurchased $2.16 billion in stock since March 2023. A new $750 million repurchase program was authorized in October 2025.
The pipeline successor, zanzalintinib, has a potential FDA approval decision in December 2026 for colorectal cancer and mid-2026 readouts in non-clear cell renal cell carcinoma.
This is a classic Magic Formula setup: a high-quality, cash-generating business trading cheaply because of a real but well-known overhang. If the patent extension litigation succeeds or zanza launches well, today’s multiple looks too low.
3. MediaAlpha (MAX, Market cap $600M)
Magic Formula metrics: ROCE 3Yr: 43%; EV/EBIT: 8.7x
MediaAlpha is the leading programmatic customer acquisition platform for the U.S. insurance industry. The company connects insurance carriers with online shoppers. They operate primarily in property & casualty (auto/home), health, and life insurance, and earn a fee on each consumer referral.
MAX ranks well on the Magic Formula with a ROCE of 43% and an EV/EBIT of 8.7x.
I picked MAX over CorMedix (CRMD), which actually ranked a bit higher on combined rank, because I am already heavily exposed to pharma/healthcare in this portfolio (HRMY, RIGL, CPRX, SIGA, LNTH, EXEL, plus MOH and CI on the insurance side).
A few things to note about MediaAlpha:
2025 was a record year, with revenue of $1.1B (up 29%), transaction value of $2.2B (up 45%), and net income of $26.8M.
The Property & Casualty insurance vertical, which is now the core of the business, grew transaction value 65% in 2025 to $1.9B as auto insurance carriers ramp customer acquisition spending after years of pullback.
The stock has been volatile and well off the 52-week high of $13.71 from December 2025, partly driven by a Q4 2025 revenue miss reported in February and broader macro concerns weighing on cyclical names. Goldman Sachs cut its price target from $13.50 to $11.50 in February.
Q1 2026 earnings on April 29 will be a near-term catalyst (but also a risk as this is the kind of stock that can move 15%+ on earnings).
On Monday, I’m adding these 3 names to the Magic Formula Portfolio and then hold them for one year, as Greenblatt prescribes.
That will bring me to 24 stocks in the portfolio. The goal is to get to a full portfolio of ~25 names, so I will be essentially fully invested.
“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!
Thank you for the shout out! I hope you make some money in LULU!