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MagicDiligence (< 20)

February 2010

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Magic Formula Weekly Roundup 2/27

February 27, 2010 – Comments (0) | RELATED TICKERS: MNST , DELL , CSKI

This week's turnover in our three Magic Formula Investing screens:  [more]

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Magic Formula Stock Review: Odyssey Healthcare (ODSY)

February 25, 2010 – Comments (0) | RELATED TICKERS: ODSY.DL , CHE , AMED

Odyssey Healthcare (ODSY) is one of the largest hospice care providers in the United States, with Medicare-certified programs in 30 states and around 12,000 average daily patients. Most of Odyssey's revenues are from home care services (over 95%). Services provided include nursing, social services, patient and family counseling, and provision of medical equipment and supplies. The majority of patients suffer from terminal illness and are generally expected to live less than 6 months. Odyssey relies heavily on Medicare reimbursement for its services, paying over 90% of the firm's revenues.

This last point is an important one to understand, as it represents a significant event risk. Medicare is the federal health insurance program for people aged 65 and over. Under the program's hospice benefit, Medicare covers nearly all services provided by Odyssey. The rates the program will pay are updated annually, and historically have increased in the 4-5% range each year. Additionally, Medicare has a cap on the amount it pays per beneficiary. Without getting into too much detail, Medicare pays for about 160 days of patient care, and any payments exceeding this must be returned by Odyssey. Historically, these chargebacks have been minor, representing 1-2% of sales in any given year. However, adverse changes to Medicare reimbursement or coverage policies would have a major effect on Odyssey and its competitors. With healthcare costs in the radar of the federal government, it is something to be concerned about, however unlikely the risk may be.  [more]

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Three Red Flags to Look for in Magic Formula Stocks

February 23, 2010 – Comments (0) | RELATED TICKERS: JHTXQ , USMO , SNTA

Over the course of the past 2 years following and reviewing stocks in Joel Greenblatt's Magic Formula Investing (MFI) strategy (official screen), there have been a number of recurring themes that have occurred in the population of stocks screened in. These themes range across a number of characteristics: industry, product, business model characteristics, capital structure, and so forth. Today, I want to talk about possibly the most important one: common traits that cause what I call "Magic Formula mirages".

As many readers know, Greenblatt laid out the MFI strategy in his book The Little Book that Beats the Market. Stocks are ranked by just two metrics: earnings yield and return on capital, both altered from the traditional calculation to improve the ability to compare differing accounting and financial characteristics. The highest composite ranked stocks with these two metrics are presented as recommended stocks to purchase. The idea is that combining high earnings yield as a sign of a cheap stock price, with high return on capital as the mark of a good business, MFI investors purchase only good businesses trading at cheap prices.  [more]

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Magic Formula Weekly Roundup 2/20

February 20, 2010 – Comments (0) | RELATED TICKERS: ADP , CEPH , NOV

This week's turnover in our three Magic Formula Investing screens:  [more]

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Magic Formula Stock Review: Sharps Medical (SMED)

February 18, 2010 – Comments (1) | RELATED TICKERS: SRCL

Sharps Compliance (SMED) is a provider of medical waste disposal solutions. The flagship product is the Sharps Disposal by Mail System. This product is simply a sealed, link and puncture resistant container that allows medical waste to be mailed to a disposal center via the U.S. Postal Service or UPS. The waste is tracked electronically, allowing documentation of proper disposal.

Another important product for Sharps is their Medical Waste Management System, or MWMS. This is a comprehensive system designed to meet the waste disposal needs of the “alternate site market”, which simply refers to settings outside of the hospital. In general, MWMS is a package of services, including the Disposal by Mail System, and also inventory, training, data management, and other services that provide for a complete solution for entities such as emergency preparedness services.  [more]

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Top Ten Magic Formula Stocks by Forward Dividend, Price/Sales, Price/Book Ratios

February 16, 2010 – Comments (1) | RELATED TICKERS: JHTXQ , GME , RGR

Every so often, MagicDiligence compiles a list of Magic Formula stocks sorted by their forward dividend yield, price-to-sales ratio, and price-to-book ratio for investors that like to use those metrics. The result is a list of attractive value stocks for additional research. Here are the top 10 in each of the three metrics listed above:   [more]

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Magic Formula Weekly Roundup 2/13

February 13, 2010 – Comments (0) | RELATED TICKERS: GPS , OSK , HRB

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

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Magic Formula Stock Review: Oshkosh Truck (OSK)

February 12, 2010 – Comments (2) | RELATED TICKERS: OSK , NAV

Oshkosh (OSK) is a specialty vehicle producer. The firm has been around since 1917, and services a wide range of customers and applications. Currently the largest customer is the U.S. Department of Defense (DoD), which accounted for over 76% of sales in the most recent quarter, and traditionally about 30% of sales. Oshkosh builds mine-resistant vehicles and both medium and heavy-duty vehicles for various branches of the military. DoD has been a major customer for over 80 years. Defense is also, by far, the most profitable of Oshkosh's business divisions.

The company also has several non-defense related segments. The largest of these is Access equipment, which effectively represents Oshkosh's 2006 purchase of JLG Industries. JLG provides aerial work platforms (think electric pole repairs, although they are used for many jobs) and telehandlers (long-armed fork lifts). Access generated about 30% of sales in the most recent quarter, and is usually more around 40%.  [more]

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5 Interesting Large-Cap Magic Formula Stocks

February 09, 2010 – Comments (0) | RELATED TICKERS: AAPL , GIS , CLX

Magic Formula Investing (MFI) is probably most popular for digging up attractively priced and quality small-cap stocks that have been overlooked or misunderstood by the market. Small-caps are usually not covered by a lot of analysts and not talked about on CNBC, yet small-cap value has been the best performing equity group historically. The book behind MFI, Joel Greenblatt's The Little Book that Beats the Market, confirms that this group also performs better using the strategy's principles. While the book's analysis showed the top MFI stocks of any size outperforming the S&P 500 by 18.5% annually, limiting to just the largest 1,000 stocks reduced outperformance to 11.2% annually.

While that is a significant drop, it is still an outstanding performance. There are clearly reasons why some investors prefer to stick to large-cap companies in their equity portfolios. For one, these stocks are more familiar to investors, making them easier to understand. Large companies also (usually) have much wider product lines, better economies of scale, long operating histories, diverse customer bases, and easy access to the credit markets, all of which most small-caps cannot boast. Additionally, large-caps usually have less volatile up-and-down price swings, which can be un-nerving to inexperienced investors. Many people feel more comfortable investing in large companies because of these advantages.  [more]

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Magic Formula Weekly Roundup 2/6

February 06, 2010 – Comments (0) | RELATED TICKERS: GPS , DISH

This week's turnover in our three Magic Formula Investing screens:  [more]

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Magic Formula Stock Review: Total System Services (TSS)

February 04, 2010 – Comments (0) | RELATED TICKERS: TSS , V , MC

Total System Services (TSS), or TSYS, is a provider of electronic payment processing for both financial and non-financial firms worldwide. TSYS was spun off from Synovus Financial (SNV) at the end of 2007. The company provides banks and retailers the ability to outsource their credit and debit card portfolio management. TSYS handles all management tasks, such as creating and mailing cards and billing statements, processing transactions, and so forth. Revenues are earned largely on volume, based on the number of accounts managed, transactions handled, and statements mailed. TSYS also provides additional offerings to clients such as merchant acquiring services, credit evaluation, fraud detection, and loyalty programs.

The company's business model revolves around signing customers to multi-year processing contracts. In normal economic times, this is a very attractive model. Multi-year fixed arrangements provide TSYS with predictable revenues, allowing management to effectively manage expenses. This is evident from the company's remarkably stable operating margins, which have remained in a tight range between 22-25% throughout the wild economic swings of 2004 through the present. Credit card processing is also a relatively stable business. Cards themselves (both credit and debit) have been increasingly utilized for everyday payments at the grocery store and gas station, and while volume on discretionary purchases may ebb and flow, transactional volume rarely strays out of single-digit growth or loss territory. TSYS is a stable business.  [more]

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Book Review: Why Are We So Clueless about the Stock Market?

February 02, 2010 – Comments (1) | RELATED TICKERS: FNMA , FMCC , AIG

Are you clueless about the stock market? If so, or if you are not sure, Mariusz Skonieczny's book is for you. Why Are We So Clueless about the Stock Market? is a short, 150 page read that focuses on the principles espoused by some of the world's most successful investors. MagicDiligence recommends the book for both new investors and for experienced investors who are looking to "get back to the basics".

The book's first few chapters cover a fact that often gets lost in the din of technical trend following and macro-economic predictions: underneath a stock is a business, and the outcome of that business determines the outcome for an investment in its stock, over the long run. Skonieczny lays out briefly what a business is, and then talks about how a business creates wealth for its owners. For companies listed on public exchanges, those owners are stock investors. I liked how the book follows the passe example of a lemonade stand, starting out with "why start the stand"? The answer, of course, is to earn a better return on investment capital that can be achieved through alternatives like a savings account. The author then goes through factors that can erode these returns on capital, particularly competition, and how having an economic moat protects against this.  [more]

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