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MagicDiligence (< 20)

May 2010

Recs

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Magic Formula Weekly Roundup 5/29/2010

May 29, 2010 – Comments (2) | RELATED TICKERS: DELL.DL , MO , MSFT

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

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Valuing Stocks: Discounted Free Cash Flow

May 25, 2010 – Comments (1) | RELATED TICKERS: HD , LMT

An investor can do the most thorough analysis of a company, pouring over financial statements, reading tomes of research, consulting industry experts, and so forth. One can be completely convinced of a firm's solid growth prospects, its impeccable financial standing, and impenetrable economic moat that gives it years, if not decades, of protection against competition. An investor can credibly identify an outstanding company... but still lose money investing in it if he pays too much.

The single most important part of stock investing is not paying too much for the investment. To do this, one must gather the facts together, and make reasonable projections based on both future prospects and historical norms. Doing this, several techniques can be used to produce a "fair value" - a target price that the investor believes the company is worth. Then, the investor should wait until the market price is a sufficient percentage below this "fair value" (e.g. 30% or more). By doing this, the investor leaves him/herself a margin of safety, because it is almost guaranteed that his or her projections will not be correct. Once the stock price returns to a level near "fair value", the stock should be sold and the gain (or loss, if fair value has fallen), booked.  [more]

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Magic Formula Weekly Roundup 5/22/2010

May 22, 2010 – Comments (0) | RELATED TICKERS: DECK , GPS , MSFT

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

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Magic Formula Stock Review: Earthlink (ELNK)

May 21, 2010 – Comments (0) | RELATED TICKERS: CMCSA , ELNK , TWC

EarthLink is a large Internet service provider in the U.S., servicing over 2 million consumer and small business customers. The company provides about 44% of those customers with broadband access, and the rest through premium dial-up, which Earthlink looks to be a leader in. You read that right. Earthlink's strategy is to be the leader in servicing the premium dial-up Internet access market.

Obviously, with that strategy revenue growth is not a priority here. Subscriber count was down 22% in the most recent quarter. Revenues for 2009 were down over 24% from 2008 levels. Broadband is a lower margin business, so as more and more dial-up customers convert over, operating margins may take a hit. Growing the dial-up subscriber base will have to be achieved by buying existing customers from legacy providers, most likely MSN (MSFT). Clearly, growth here isn't going to come from the top line. This is a business that will likely see declining sales for the foreseeable future.  [more]

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The Forbes Top 150 Ranked in Magic Formula Fashion

May 19, 2010 – Comments (0) | RELATED TICKERS: AZN , IBM , PM

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 5/15/2010

May 15, 2010 – Comments (0) | RELATED TICKERS: DNB , GILD , MNST

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

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Magic Formula Stock Review: Impax Labratories (IPXL)

May 13, 2010 – Comments (2) | RELATED TICKERS: CAH , TEVA , IPXL

Impax Labratories (IPXL) is a generic drug maker. The company focuses on controlled-release generic substitutes for brand-name drugs that have gone off-patent, or have insufficient patent protections. Currently, the company has 57 approved generic drugs, including substitutes for Claritin, Wellbutrin, Prilosec, and Flomax. The bulk of Impax's sales are directly to wholesalers like Cardinal Health (CAH) or McKesson (MCK), although the firm also has joint ventures with several larger generics companies to sell their drugs, including a fairly large one with generic powerhouse Teva (TEVA). Impax is also developing a couple of branded drugs, although this is not really material to results yet.

Generics are a much different business than branded pharmaceuticals. In branded drugs, companies like Pfizer (PFE) spend billions on large R&D pipelines to develop proprietary drugs. The success rate is low, but the winners are incredibly lucrative, with a decade of patent protection and huge profit margins.  [more]

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Magic Formula Weekly Roundup 5/8/2010

May 08, 2010 – Comments (0) | RELATED TICKERS: DECK , HAS , LLY

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

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Magic Formula Stock Review: CF Industries (CF)

May 07, 2010 – Comments (0) | RELATED TICKERS: CF , AGU

CF Industries (CF) is a fertilizer producer, primarily of nitrate-based products, which will account for well over 80% of revenues. The remainder of sales come from phosphate-based fertilizers. CF is vertically integrated in phosphates - they mine the phosphate rock themselves to produce the end products.

Fertilizer is a commodity product, distinguished by end users only by price. 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. Potash (used for potassium) is attractive, as deposits are rare, very expensive to mine, and largely controlled. Phosphorus comes from phosphate rock, which is a commodity that is readily available but swings wildly in proce.  [more]

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A Simple Trading Strategy for Magic Formula Stocks?

May 04, 2010 – Comments (0) | RELATED TICKERS: APOL , DECK , UIS

MagicDiligence is a fundamental analysis site. All of the site's stock reviews and recommendations are based on fundamental analysis of the company's financial statements, competitive position, growth potential, management, and so forth. Considering all of this, I try to determine a fair value and give the Magic Formula stock a thumbs up or thumbs down (or neutral) depending on the relationship of the current stock price to that fair value.

However, in 2 and a half years of staring at the price movements of Magic Formula stocks, there have been several times when I've seen an already undervalued stock plummet 20% or more in a short amount of time, and thought "that stock is way oversold". Usually within a few weeks the price is back up to at least where the original drop took place. The phenomenon is especially prevalent in MFI because the screen produces so many small cap listings, which can be quite volatile in price.  [more]

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Magic Formula Weekly Roundup 5/1/2010

May 01, 2010 – Comments (0) | RELATED TICKERS: MHFI , OSK , RTN

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

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