CNBC Stock Blog

Hedge Fund Manager's Formula: Cheap + Value = Buy

Hedge fund manager Joel Greenblatt's "magic formula" for investing is to buy shares of good companies that are very cheap right now.

That formula has helped the four funds started by the founder of Gotham Capital Management, and author of the 2005 tome "The Magic Formula," have annual returns of over 50 percent.

"It’s a very scary time to invest, and that’s when you get your best bargains," he told CNBC Tuesday. "Stocks are reflecting a lot of skepticism right now, and usually it doesn’t look this good unless things are terrible."

Magic Formula Investing

He puts greater weight on shares of consumer services, retail and semiconductor companies. His picks include Gamestop, American Eagle , Best Buy , Microsoft, Wells Fargo and Hewlett-Packard.

What they have in common is "each one of those companies is hated brutally by most people."

Take HP , whose board replaced CEO Leo Apotheker with former eBay CEO Meg Whitman last week.

"We know the story" with HP, Greenblatt said. "Then again, it earns close to $5 and is trading a little over four times earnings. You pays your money and you takes your chances."

Greenblatt acknowledged his formula isn't perfect. "I'm not projecting the future," he said. "All I know how to do is figure out what [a stock is] worth and pay a lot less. It doesn’t always work."

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Disclosure information was not available for Joel Greenblatt or his company.