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MagicDiligence (< 20)

January 2009

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Magic Formula Weekly Roundup 1/31

January 31, 2009 – Comments (0) | RELATED TICKERS: CSCO , AEO , GPS

Weekly roundup of stocks moving in and out of the Magic Formula Investing screen.

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(this article contains lists and/or tables that do not format well in the CAPS blogging system)

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Magic Formula Stock Review: Volcom (VLCM)

January 29, 2009 – Comments (1) | RELATED TICKERS: VLCM.DL , PSUN , ZUMZ

Volcom designs, markets and distributes action apparel, mainly focused on the snowboarding, skateboarding, and surfing crowd. The majority of the company's business is in the United States (over 55%), while Europe contributes about 30%, and Canada, Japan, and Australia fill out the geographic picture. Volcom apparel is sold through lifestyle retailers such as Pacific Sunwear (PSUN) or Zumiez (ZUMZ), as well as many small, independent surf shops and a few of it's own retail stores (currently under 20 locations). The company went public in 2005.

Volcom has a lot of positive attributes, despite being in a classic no-moat business like youth apparel. For one, the brand has a lot of cache appeal in it's niche. The founder and CEO, Richard Woolcott, was a professional surfer for Quiksilver (ZQK) in the 1980's. His unique outlook has no doubt protected the authenticity of the brand. Woolcott has resisted the temptation to push the brand into wide distribution channels (like department stores), which would destroy the company's image. Management has also built the brand through grassroots efforts like sponsoring popular skateboarders, hosting events, and producing videos. Not only are these more effective at reaching the core customer, but also much lower cost than more traditional advertising channels.  [more]

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Understanding the Cash Flow Statement

January 26, 2009 – Comments (1) | RELATED TICKERS: INTC , VMW , MU

The next entry in the financial statement series examines the cash flow statement, where companies reconcile their income statement with the amount of cash flowing into or out of the business. What do the line items represent and what can a cash flow statement tell us about a business? A look at this most important of financial statements.   [more]

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Magic Formula Weekly Roundup 1/24

January 24, 2009 – Comments (0) | RELATED TICKERS: MSFT , ADBE , AEO

Weekly roundup of stocks moving in and out of the Magic Formula Investing screen.

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(this article contains tables and/or lists that do not format in the CAPS blogging system)

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Magic Formula Stock Review: Deluxe Corp (DLX)

January 22, 2009 – Comments (0) | RELATED TICKERS: DLX , SPLS , ODP

Deluxe Corporation (DLX) is a provider of customized printed products to small businesses, banks, and consumers. The company is organized into 3 business units, distinguished mainly by the target customer. The Small Businesses Services unit, accounting for about 58% of sales, targets (you guessed it) small businesses by providing business checks, forms, marketing fliers, stationary, business cards, and so forth. Brands here include Deluxe, Safeguard, McBee, and RapidForms. Financial Services (29%) targets large banks and other financial concerns, providing checks, gift cards, and fraud protection services. Direct Checks (13%) targets consumers with similar products. Deluxe is one of the largest printed product providers in the U.S. and Canada (it's only two geographies), servicing over 6 million small businesses and 7,000 financial institutions. Check products account for nearly 65% of sales, other printed items about 25%, and services filling out the remainder.

Deluxe fails all of the main investment tests - growth, competitive moat, and financial strength - and as such I recommend that Magic Formula investors look elsewhere. Printed checks are in secular decline. In 2007, checks accounted for just 35% of all non-cash payments, well down from 45% in 2004, according to the Federal Reserve. Check volume has been declining about 4% annually this decade as an increasing number of consumers and businesses elect to pay their bills with credit/debit cards, and through online transactions. This leaves only cost cutting, market share gains, and acquisitions as growth avenues for Deluxe. Management has been trying to execute on all 3, cutting SG&A spending and closing a number of acquisitions to try and establish an Internet presence. However, revenue has declined at an annualized 4% since 2005, and there is little to suggest this trend will reverse itself.  [more]

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Understanding the Balance Sheet

January 20, 2009 – Comments (0) | RELATED TICKERS: INTC , VMW , MU

The second in the financial statement series, this entry examines the balance sheet. A balance sheet is like a credit report for a company. What do the line items represent and what can a balance sheet tell us about the desirability of investing in a particular company?  [more]

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Magic Formula Weekly Roundup 1/17

January 17, 2009 – Comments (0) | RELATED TICKERS: ACN , MSFT , CSCO

Weekly roundup of stocks moving in and out of the Magic Formula Investing screen.

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(this article contains tables and/or lists that do not format in the CAPS system)

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Magic Formula Stock Review: Mosaic (MOS)

January 16, 2009 – Comments (0) | RELATED TICKERS: MOS , TRA.DL , POT

Mosaic (MOS) is one of the biggest producers of fertilizer in the world. It is the largest producer of phosphate fertilizers worldwide (16% global market share), and is #2 in potash fertilizers (15%), second only to fellow Magic Formula stock, Potash Corporation of Saskatchewan (POT). The company is vertically integrated, controlling the supply chain from the mining of phosphates and potash, through processing, through production and sale of the fertilizer end product. Phosphates account for about half of Mosaic's sales, while potash accounts for about a quarter, with the other quarter coming mainly from offshore distribution and resale. The company was formed through a merger of IMC Global and Cargill's fertilizer business, and Cargill maintains majority ownership.

Fertilizer is basically a commodity product, distinguished by end users only by price. But to really understand Mosaic's competitive position, we must understand the basic dynamics of the fertilizer industry. There are 3 types of fertilizers: nitrogen based, phosphate based, and potash based. Weekend gardeners might recognize these 3 numbers from the side of a fertilizer bag (nitrogen-phosphorous-potassium, or N-P-K). The different fertilizer producers generally skew towards one of the three types, and this greatly affects competitive position as the underlying dynamics are quite different.  [more]

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Understanding the Income Statement

January 12, 2009 – Comments (0) | RELATED TICKERS: INTC

In this new series, MagicDiligence will investigate how to analyze a company's financial statements. This first entry looks at the income statement. What is it's purpose and what does each line item represent?  [more]

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Magic Formula Weekly Roundup 1/10

January 10, 2009 – Comments (0) | RELATED TICKERS: ADSK , AEO , XOM

Weekly roundup of stocks moving in and out of the Magic Formula Investing screen.

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Magic Formula Stock Review: Lorillard (LO)

January 08, 2009 – Comments (0) | RELATED TICKERS: MO , RAI

Lorillard is the third largest cigarette producer in the United States. The company was spun off from conglomerate Loews (L) back in June of this year. Lorillard's golden asset is the Newport menthol cigarette brand. Newport has a market share of close to 35% in the menthol cigarette category, which is good enough to earn Lorillard a 10% total market share, behind only Altria (MO) and Reynolds American (RAI) in the U.S. Newport accounts for over 90% of sales, but the company also produces other, non-menthol branded cigarettes under the names Kent, Satin, True, and Max. Old Gold and Maverick brands round out the portfolio on the discount rack.

Lorillard reminds me a lot of a similar company I reviewed earlier this year: UST. UST has a lot of parallels to Lorillard. That company dominated the smokeless tobacco category with premium brand Copenhagen, similar to Newport. UST was in good financial shape and paid a generous dividend, like Lorillard (over 6.8% currently). However, I though UST had too few growth opportunities and that the price was not low enough given that fact. My final opinion of Lorillard falls almost exactly along those lines. Of course, a few months later UST was purchased by Altria at a 35% premium, so take that for what it's worth!  [more]

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5 Steps for Getting Started in Magic Formula Investing in 2009

January 05, 2009 – Comments (0)

A simple 5 step process to fulfilling that New Year's resolution and get started with Magic Formula Investing in 2009.

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(this article contains tables and/or lists that do not format well in the CAPS blogging system)

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Magic Formula Weekly Roundup 1/3

January 03, 2009 – Comments (0) | RELATED TICKERS: MSFT , BBSI , XOM

Weekly roundup of stocks moving in and out of the Magic Formula Investing screen.

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(this article contains tables and lists that do not format well in the CAPS blogging system)

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Magic Formula Stock Review: Herman Miller (MLHR)

January 02, 2009 – Comments (0) | RELATED TICKERS: MLHR , KNL , SCS

Herman Miller is one of the largest designers and manufacturers of office furniture products worldwide. The company is known for it's innovative designs, including the Aeron chair and the first cubicles. Herman Miller is the third largest competitor in the office furniture industry, trailing Steelcase (SCS) and HNI (HNI). More specifically, MLHR can be lumped into the "premium" segment of the market, where it is the largest player by sales but trails primary rival Knoll (KNL, another Magic Formula stock) in profitability.  [more]

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