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MagicDiligence (< 20)

March 2010

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7

Morningstar's Look at Magic Formula Investing

March 30, 2010 – Comments (3) | RELATED TICKERS: PRSC , WTW

Joel Greenblatt's book The Little Book that Beats the Market, in which the Magic Formula Investing (MFI) strategy was revealed to the world, was first published in December 2005. After an initial rush of publicity, the strategy has largely been relegated to the background since then, despite continuing to vastly outperform the market since it was made public. Only recently are we seeing some of the more mainstream investment media start to discover and write about it, probably due largely to the publicity push behind Greenblatt's Formula Investing venture to provide "do-it-for-me" services for those interested in MFI.

This can be seen recently in a piece published by Morningstar looking into the Magic Formula. Morningstar is most widely known as a company that tracks, rates, and provides data on the thousands of different mutual funds out there, though they also have services that provide equity and ETF ratings. I was rather surprised it took the site over 4 years to write anything substantial about MFI, as their equity review service is highly skewed towards the value investing principles of Warren Buffett, who was tutored by Benjamin Graham, from whom MFI is inspired.  [more]

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2

Magic Formula Weekly Roundup 3/27/2010

March 27, 2010 – Comments (0) | RELATED TICKERS: CSKI , GD , WTW

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

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4

Magic Formula Stock Review: Chicago Bridge & Iron (CBI)

March 26, 2010 – Comments (0) | RELATED TICKERS: CBI , FLR , JEC

Chicago Bridge & Iron (CBI) is yet another Magic Formula engineering and construction (E&C) company, joining the likes of similar firms like Fluor (FLR), Jacobs Engineering (JEC), and KBR (KBR). CBI's closest cousin amongst the Magic Formula E&C stocks is probably Foster Wheeler (FWLT), as both companies focus primarily on energy related projects for oil and gas companies.

I thought it was interesting that Chicago Bridge & Iron is not located in Chicago (in fact, headquarters is in the Netherlands!), and does not construct bridges. The "iron" part might make some sense, as about a third of sales come from the steel plate construction business, which constructs modular structures for use in energy and storage applications. The bulk of revenues (almost 60%) come through the CBI Lummus division, which provides services for the design and construction of liquified natural gas (LNG) plants and terminals, oil and gas refineries, and pipelines. The recently acquired Lummus Technology business, about 8% of sales, sells proprietary technology (licensing) and equipment that can be utilized as a component of these same projects. CBI relies on the oil and gas majors for the bulk of its business. The majority of the company's business is overseas, with 72% of 2009 revenues out of the U.S. and 90% of new orders.  [more]

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12

5 Reasons Not to Short Sell Stocks

March 23, 2010 – Comments (2) | RELATED TICKERS: JHTXQ

Many novice investors have often asked the question "what does it mean to be long vs. short?". When most outside of the investing world think of investing in stocks, they think of the "long" side. Here the objective is to find stocks of companies that are appear to be priced too cheaply relative to earnings or net assets. The stock is then held until the price appreciates to a value at or above a fair price against these metrics, at which point it should be sold. This "buy low, sell high" philosophy is what investors mean when they talk about being long.

However, it is possible to take the other side of this phrase and "sell high, buy low" - although it should really be labeled "borrow high, buy low" as we will see. This type of position is known as "shorting" a stock. In this article, I will examine the mechanics of shorting a stock, why investors do it, and finally, why I believe that investors following the Magic Formula Investing (MFI) strategy should avoid any "black magic" formula to short stocks that rank poorly.  [more]

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Magic Formula Weekly Roundup 3/20/2010

March 20, 2010 – Comments (0) | RELATED TICKERS: MNST , TSS , IDCC

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

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4

Magic Formula Stock Review: Lender Processing Services (LPS)

March 19, 2010 – Comments (0) | RELATED TICKERS: JPM , WFC

Lender Processing Services (LPS) is the largest mortgage processing provider in the United States. The company offers services that cover the entire span of a mortgage loan, from origination through service of existing loans and even handling defaults. Examples of services provided include title search, closing, lien recording, appraisals, flood zone certification, foreclosure, property inspection, and so forth. LPS was spun off from Fidelity National Information Services (FIS) in 2008.

This company has an attractive business model. LPS is in effect an outsourcing solution for lending institutions, primarily large banks. Revenue is dependent on the volume of mortgages coming through the pipeline. One nice thing about the business is how it is set up to thrive during boom or bust periods for real estate. When the housing market is strong, LPS earns increased business on its loan origination services. When it is extremely weak, mortgage default volumes skyrocket and LPS earns the dough providing foreclosure and other end-of-life functions.  [more]

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10

Has the Tax Preparation Industry Lost Its Luster?

March 16, 2010 – Comments (5) | RELATED TICKERS: HRB , JHTXQ , INTU

In reviewing the overall top 50 Magic Formula stocks from the official screen recently, it struck me as interesting that the two largest tax preparation firms in the U.S., Jackson-Hewitt (JTX) and H&R Block (HRB), both had made the list. While Jackson-Hewitt has long been in and out of the Magic Formula screens due to operational issues, H&R Block was a new addition, and this old-line tax prep firm had just gotten beat down 22% over a 3-week time span, one of its worst drops in 25 years.

Could it be that there are some fundamental changes in the office-based tax preparation industry that are causing these traditional powerhouses to suffer? Or are we looking at short-term concerns that may indicate that these two stocks could be attractive investments? Let's take a look at what is going on in the industry and try to come to a conclusion on those questions.  [more]

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2

Magic Formula Weekly Roundup 3/13/2010

March 13, 2010 – Comments (0) | RELATED TICKERS: GME , MNST , BKE

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

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6

Magic Formula Stock Review: Magic Software (MGIC)

March 11, 2010 – Comments (0) | RELATED TICKERS: MGIC , MSFT , CRM

Magic Software (MGIC) is a business software company based in Israel. The firm's business revolves around two main products: uniPaaS, a software development platform designed for creating web-delivered business applications; and iBOLT, for integrating business data from various enterprise software applications. Magic earns revenues from new license sales (34%), maintenance and technical support contracts for existing users (23%), and consulting services (43%, but much lower margin). The company has a wide range of customers in virtually all geographic locales around the world.

The products themselves are somewhat difficult to understand for those not familiar with software development and business management applications. uniPaaS is what is known as a "platform-as-a-service" offering. If you think to your laptop computer, it is controlled by an operating system (OS), most likely Microsoft's (MSFT) Windows. You run applications off of this OS, such as a web browser or spreadsheet program. These applications are built using "development platforms" that run on top of the operating system. Some examples for Windows would include Microsoft's .NET platform, and Sun's JAVA platform. These provide software developers with the tools needed to build applications.  [more]

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5

5 Points from Warren Buffett's 2010 Shareholder Letter

March 09, 2010 – Comments (1) | RELATED TICKERS: BRK-B , KO , PG

Warren Buffett is a legend in the investing world. The chairman of Berkshire Hathaway (BRK-B), he has amassed a fortune of over $60 billion dollars, using his company as a vehicle for investing in stocks, fixed income instruments, and buying entire businesses. As of the last list, he was the 2nd richest man in the world according to the Forbes 400. Berkshire has evolved from a textile mill in the northeast into a huge conglomerate, with operations ranging from car insurance (GEICO) to underwear (Fruit of the Loom) to paint (Benjamin Moore) and now railroads (Burlington Northern). Moreover, some of Warren's stock investments, such as his positions in Moody's (MCO), Coca-Cola (KO), and Gillette (now Proctor & Gamble PG) are textbook examples of buying quality at bargain prices. Berkshire's performance has been remarkable - since 1965, the company has grown book value at an annualized 20.3%, vs. the S&P 500's 9.3% annual gain, outperforming the market in 39 of those 45 years (Berkshire underperformed in 2009).

So it is with bated breath that value investors await his annual letter to shareholders. These have been Warren's principal method of passing his wisdom along to the general public, on everything from how he chooses stocks to his outlook on the near future. Entire books have been written from the content in his letters - for example, The Essays of Warren Buffett (review) is an organized compilation of the wisdom from these letters. Let's take a look at 5 points from his 2010 letter to shareholders and see what nuggets we can apply to stock investing.  [more]

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Magic Formula Weekly Roundup 3/6/2010

March 06, 2010 – Comments (0) | RELATED TICKERS: DECK , LLY , GPS

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

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3

Magic Formula Stock Analysis: SuperMedia (SPMD)

March 04, 2010 – Comments (0) | RELATED TICKERS: IAR , VZ , GOOGL

It is fairly rare that MagicDiligence has an unabashed negative opinion towards a Magic Formula stock. Joel Greenblatt's strategy is mechanically designed to find what should be good companies that are trading at cheap valuations. A number of provisions are made in the mechanical formulas to prevent poor stocks from making it in. For example, companies with a lot of debt and little cash are penalized by using enterprise value instead of market capitalization. While there are certainly bad stocks in MFI, the truth is that a solid majority of the stocks filtered by the official screen are "OK" to "great" potential investments.

That said, SuperMedia (SPMD) is just a bad Magic Formula stock. The company is the post Chapter 11 re-spawn of Idearc (formerly IAR), a stock so bad that it was one of the reasons for starting MagicDiligence in the first place. After reorganizing in bankruptcy court, SuperMedia's balance sheet is better - but still pretty ugly. Moreover, the business itself has basically not changed at all. Let's take a look.  [more]

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5

Top Ranked Magic Formula Stocks In Motley Fool CAPS

March 02, 2010 – Comments (0) | RELATED TICKERS: GIB , HI , JCOM

Many MagicDiligence readers are probably familiar with The Motley Fool's CAPS service, and for those of you who are not, I highly recommend checking it out. In essence, CAPS is the world's largest free stock picking game. Every player can rate any stock to outperform or underperform the market, for a variety of time periods from "a few months" to "5 years or more". The rating is then assigned a beginning stock price, and the percentage change in the stock price is tracked vs. the change in S&P 500 (including dividends). Picks outperforming the S&P 500 get a positive score, and underperformers get a negative score. Then all players are assigned a rating based on a number of factors, including total overall score, pick accuracy, and so forth. Like high school, the player score is between 0-100, and the higher the better.  [more]

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