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MagicDiligence (< 20)

May 2009

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Minority Interest: What it is, How it is accounted for, Why it matters

May 29, 2009 – Comments (0) | RELATED TICKERS: VIA-B.DL

MagicDiligence has published several articles on analyzing stocks, including explanations of the income statement and the balance sheet, among others. But one topic that has not been covered that has generated some reader questions is the topic of minority interest.

When looking at a company's financial statements, minority interest generally shows up in two places. On the income statement, it usually appears as a non-operating line item, and on the balance sheet, it nearly always occurs as its own line item at the bottom as a stand-alone liability. But what is the point of these? What causes these charges (or gains) to appear and how do they effect common shareholders like you or me? What is the relevance of minority interest when calculating Magic Formula statistics?  [more]

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Magic Formula Stock Review: Cherokee (CHKE)

May 26, 2009 – Comments (0) | RELATED TICKERS: CHKE , ICON , NKE

For those who have ever wondered into a Target to buy new clothes or shoes, encountering the Cherokee (CHKE) brand is inevitable. What you may not know is that this remarkable little company has only a handful of full time employees, less owned property then most small families, and yet collected over 36 million dollars in revenue last year and turned 44% of those revenues in free cash for it's stockholders! Clearly this is one exceptional business - and according to the Magic Formula it's now on sale. Sounds like a great buy, right? Let's dig a little deeper.

First, the business. Cherokee is strictly a brand licensor. It owns the Cherokee, Sideout, and Carole Little brands (among others), which it licenses to selected retailers. The company does no product design, no production sourcing, and no marketing - this is left to the licensees. In effect, Cherokee replaces private label brands for these licensees. This is what's known as a "light" business model, requiring next to no capital investment and little expenses save for paying the few employees and maintaining the brand trademarks in various countries. Every dollar invested into capital spending returns several hundred percent in earnings (return on tangible capital).  [more]

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Magic Formula Weekly Roundup 5/23

May 23, 2009 – Comments (0) | RELATED TICKERS: ADSK , DOX , TTWO

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

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Magic Formula Stocks by Industry

May 19, 2009 – Comments (1) | RELATED TICKERS: GD , GRMN , MSFT

Magic Formula Investing, invented by Joel Greenblatt in The Little Book that Beats the Market, is designed to find stocks with two attributes: a high earnings yield (indicating a cheap price), and high returns on capital (indicating a good business). However, if you look at the official screens regularly, it becomes apparent that often several stocks within an individual industry sector will all appear around the same time. This indicates that the sector, not necessarily the individual stocks, is out of favor with investors.

This is important for two reasons. First, buying into sectors out-of-favor is a good contrarian strategy for value investors. The market is one of cycles, and when one industry sector is up, others are down... but you can be sure they will reverse places in time. For example, oil and gas stocks were all the rage just a year ago as crude prices soared, but today sell for 40% or more less than they did at this point in 2008.  [more]

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Magic Formula Weekly Roundup 5/16

May 16, 2009 – Comments (0) | RELATED TICKERS: PFE , HAS , NSR

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

http://www.magicdiligence.com/articles/weekly-roundup-2009-05-16

 

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Magic Formula Stock Review: Microstrategy (MSTR)

May 15, 2009 – Comments (0) | RELATED TICKERS: MSTR , MSFT , NFLX

Microstrategy is a provider of business intelligence (BI) software. Business intelligence refers to the process of consolidating, cross referencing, and examining the millions of pieces of data available in corporate databases to provide management (and in some cases, everyday employees) up to the minute information on business performance and trends. Using this information, executives can effectively manage resources to improve efficiency, reduce costs, and increase profitability.

To get a mental grasp on this, take for example one of Microstrategy's customers: Netflix (NFLX). Hypothetically, lets say Netflix has decided to push their movie rental service into a few new markets, say, cities A and B. First the company allocates marketing dollars to promoting the service on television, in newspapers, and so forth in these markets. Those marketing investments are all recorded in a corporate database. As customers begin to sign up for the free trials, Netflix records their addresses in a similar customers database. Eventually some of these trial subscribers will decide that they love the service, and begin becoming paying members. As this process takes place, Netflix marketing managers can see in real time that the marketing dollars spent in city A are resulting in a larger return on investment then those in city B, and decide to pour more money into marketing there. At the same time, the COO sees that city A is beginning to build a large enough subscriber base to consider opening a distribution center there. Business intelligence software makes this efficient use of capital possible. Without it, Netflix may have wasted tens of thousands of dollars in city B before enough evidence piled up that it was a poor geography for investment.  [more]

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Earnings Yield: Better than P/E for Valuing Stocks

May 11, 2009 – Comments (1) | RELATED TICKERS: PACR

Joel Greenblatt's Magic Formula, as described in The Little Book that Beats the Market relies on ranking stocks based on two simple concepts. The first one measures the quality of the business: return on capital, a concept I've covered in a previous article. The second statistic measures how cheap a stock is against trailing earnings: earnings yield. But what is earnings yield? It's not easily available in any run-of-the-mill stock screener. And why not use the more ubiquitous P/E ratio when valuing stocks against trailing earnings?

The first thing we need to cover is how to calculate earnings yield. To do this, we'll first look at the simple way, and then examine how Greenblatt devised his earnings yield calculation for ranking stocks for the Magic Formula screens. The simple way is just so, simply taking the inverse of the P/E ratio and turning it into a percentage:  [more]

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Magic Formula Weekly Roundup 5/9

May 09, 2009 – Comments (0) | RELATED TICKERS: ADSK , RL , MSTR

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

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Warren Buffett's Letter and the Magic Formula, 2009

May 06, 2009 – Comments (1) | RELATED TICKERS: BRK-B , BBY , BBBY

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). 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 8.9% annual gain, outperforming the market in 39 of those 44 years.

So it is with baited 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 is an organized compilation of the wisdom from these letters. Let's take a look at a few points from his 2009 letter to shareholders and see what nuggets we can apply to investing the Magic Formula way.  [more]

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Magic Formula Weekly Roundup 5/2

May 02, 2009 – Comments (0) | RELATED TICKERS: DISH , TWX

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

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(this article contains lists that do not format into CAPS)

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Magic Formula Stock Review: Korn/Ferry International (KFY)

May 01, 2009 – Comments (0) | RELATED TICKERS: KFY , HSII

Korn/Ferry International (KFY) is a management recruitment firm, focusing on mid and high level positions. The company serves a wide variety of sectors, including industrial (27%), financial services (20%), consumer products and services (17%), technology (16%), and others. Client count exceeds 5,000, and Korn/Ferry handled over 11,000 individual assignments in fiscal 2008, most at the highest executive levels of business. The company also has an impressive international footprint, operating in over 40 countries and generating nearly half of revenues outside of the United States.

The most attractive aspect of a KFY investment is the firm's financial strength. The balance sheet is in great shape, with $220 million in cash and no debt - something not all Magic Formula stocks can boast of. It's a reasonably profitable business as well, with operating margins in "normal" years in the low teens, and free cash flow margins at similar levels. Return on invested capital over the last 5 years is solid at 19%, and using the Magic Formula ROIC calculation yields a figure of 55%. 55% is a solid number, although nothing spectacular.  [more]

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