Stockpickr: Signs of Life in Post-Selloff Rubble

Known as the "investor fear gauge," the market volatility index, or VIX, was up over 60% Tuesday -- its largest move in over nine years. The markets were crushed in a post-China-crash frenzy that woke up all of the traders hypnotized by the low volatility of the past few years.

The key here is to find quality stocks trading at cheap prices and to stay focused on the primary advantage a retail investor has over an institutional investor: Your performance doesn't have to be positive every day or every month.

Let's take a look at superinvestor Joel Greenblatt, the pioneer behind Gotham Capital, two excellent value investing books, and the Magic Formula methodology.

Founded in 1985 with $7 million, Gotham Capital compounded at 50% per year for its first 10 years since inception, before fees but after expenses. After 1995, Gotham returned capital to all those who were not limited partners, and, as such, the returns were harder to come by. Gotham Capital's holdings can be found on Stockpickr. (Greenblatt's sister Linda has a several-hundred-million-dollar retail-focused hedge fund that we keep track of as well. Despite having $170 million to invest, she owns just two stocks.)

Greenblatt's books, You Can Be a Stock Market Genius and The Little Book That Beats the Markets, are well known among value investors as helpful books with cheesy titles. You Can Be a Stock Market Genius is the more complicated of the two, focused on special investing situations, such as purchasing spinoffs and studying reorganizations.

The Little Book That Beats the Markets is a book Greenblatt wrote for his kids to learn investing; it is much easier to read and follow than his first book. The Little Book That Beats the Markets advocates an approach known as Magic Formula investing, which is essentially a quantitative stock-picking approach that attempts to find high-quality companies trading at a discount.

According to Greenblatt's book, the Magic Formula has returned 20%-plus per year fairly consistently. There are several portfolios on Stockpickr that track various aspects of the magic formula.

In this article, I want to focus on the Dogs of the Magic Formula: the 10 stocks that have been crushed over the past year that now meet the other criteria, which are described below.