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MagicDiligence (< 20)

June 2010

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Magic Formula Stock Review: Eli Lilly (LLY)

June 28, 2010 – Comments (1) | RELATED TICKERS: LLY , PFE , BMY

Eli Lilly (LLY) is one of the largest of the "big pharmaceutical" companies, focusing especially on the clinical areas of the nervous system, endocrine system (hormones), cancer, and the cardiovascular system (heart and lungs). The firm also has a substantial veterinary drug business.

Lilly's largest and most important drug is Zyprexa, which is used to treat schizophrenia and bipolar disorders. In 2009, Zyprexa totaled $4.9 billion dollars in sales, putting it easily within the top 10 selling drugs worldwide and representing about 22% of Eli Lilly's total revenues. Cymbalta, a strong antidepressant, delivered $3.1 billion in sales, an impressive 15% increase over 2008 and 14% of the firm's total sales. Other blockbuster contributors include: Humalog, an insulin substitute ($1.96 billion); Alimta, a lung cancer treatment ($1.7 billion); Cialis, for erectile dysfunction ($1.56 billion); Gemzar, a pancreatic cancer drug ($1.36 billion); and Evista, for osteoporosis ($1.03 billion). In all, the company has a pretty impressive portfolio of drugs, with less concentration risk than many competitors.  [more]

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Magic Formula Weekly Roundup 6/26/2010

June 26, 2010 – Comments (0) | RELATED TICKERS: KIRK , DECK , DELL.DL

Magic Formula Investing (MFI), as described by hedge fund manager Joel Greenblatt in The Little Book that Beats the Market, consists of ranking stocks by earnings yield (cheap) and return on capital (quality), adding the rankings together, and buying from the resulting lists. Below are stocks that have moved into, and dropped out of, 3 of the MFI screens used by MagicDiligence:  [more]

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3 Interesting "In-Between" Magic Formula Stocks

June 22, 2010 – Comments (0) | RELATED TICKERS: DGX , CECO , FSYS

The Magic Formula Investing (MFI) strategy is simply a ranking system. Any particular universe of stocks can be ranked in the strategy's fashion - a composite of highest earnings yield and highest adjusted return on capital, both factors equally weighted. You can apply the strategy to rank any "basket" of stocks, ranging from entire exchange listings (or groups of exchange listings), to a pre-screened list of stocks, and so forth. The possibilities are limitless.

The official MFI site allows users to rank all U.S.-listed stocks, separated only by minimum market cap. So, for example, choosing the top 50 stocks with a minimum of $100 million market cap will produce a much different list than choosing the top 50 with a minimum $1 billion market cap. This is useful, as many investors are uncomfortable buying issues of thinly traded, micro-cap stocks that they may not familiar with (even though small-caps drastically improve performance).  [more]

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Magic Formula Weekly Roundup 6/20/2010

June 20, 2010 – Comments (0) | RELATED TICKERS: GME , LLY , MYGN

Magic Formula Investing (MFI), as described by hedge fund manager Joel Greenblatt in The Little Book that Beats the Market, consists of ranking stocks by earnings yield (cheap) and return on capital (quality), adding the rankings together, and buying from the resulting lists. Below are stocks that have moved into, and dropped out of, 3 of the MFI screens used by MagicDiligence:  [more]

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Magic Formula Stock Review: DragonWave (DRWI)

June 17, 2010 – Comments (0) | RELATED TICKERS: DRWI , VZ , S

DragonWave (DRWI) is a maker of wireless equipment used to transmit network traffic between base station endpoints (think cell towers) to the high capacity fiber optic "backbone" infrastructure that is the core of most wireless networks. DragonWave's products are marketed under the Horizon brand name. The technologies are most applicable to supporting high-speed cellular voice and data traffic, specifically 3G, WiMAX, and LTE ("4G") protocols. DragonWave is based in Ottawa, Canada, and just started trading in the U.S. on the NASDAQ last October - the offering price was $10.29, well above current trading levels in the low $6's.

This is a high-risk, high-reward Magic Formula stock, so let's first look at the "reward" part of the equation. Backhaul is an important part of wireless networks, and as mobile device traffic continues to grow, it will be imperative for the cell providers to expand the bandwidth and coverage of their networks. Think about streaming Netflix (NFLX) on your new iPhone 4 (AAPL) and you get an idea of the nearly limitless appetite for data coming down the pike. Currently, the cell networks like AT&T (T) and Verizon (VZ) have neither the bandwidth nor the speeds that are going to be necessary to support these kinds of traffic demands. Upgrading to higher bandwidth and faster speed protocols like LTE is practically a given.  [more]

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Systematic Value Investing Approaches over the Past 10 Years

June 15, 2010 – Comments (0) | RELATED TICKERS: UN , NOK

Recently, Magic Formula Investing Europe (MFIE) posted a paper that back-tested several value-based mechanical investing strategies, including Magic Formula Investing (MFI), on a list of over 3,400 "Eurozone" stocks over a 10 year period ranging from 1999 to 2009. The paper itself can be downloaded here. In this article, I want to summarize some of the notable aspects and findings that may be of interest to those who follow MFI.

First, a quick summary of the project. As noted, the testing period was 10 years, and the sample universe consisted of "Eurozone" stocks. Eurozone refers to (most) countries that have adopted the euro as their legal tender, which excludes some notable European countries such as the U.K. and Switzerland (which is also not an European Union member, for that matter). The benchmark compared against was the Dow Jones Euro Stoxx 50, which consists of 50 "blue chip" Eurozone stocks such as Unilever (UN) and Nokia (NOK).  [more]

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Magic Formula Stock Review: Daily Journal (DJCO)

June 10, 2010 – Comments (0) | RELATED TICKERS: DJCO

Daily Journal (DJCO) has two different businesses. The first is the publishing of specialized newspapers, magazines, and websites that cover items of interest to the legal community in California and Arizona. The two largest publications, accounting for about a quarter of total revenues, are the two "Daily Journals", namely the Los Angeles and San Francisco Daily Journal publications. These two papers are published daily (obviously!), covering legal topics of interest to lawyers and judges. They also provide full text and summaries of California cases. Revenues are earned through both subscription fees, commercial advertising (mostly local businesses and law firms), and public notice advertising that is required by law. Some examples of public notice advertising are foreclosure notices and fictitious business names.

In addition to the Daily Journals, DJCO publishes a number of similar daily papers that focus coverage on either the legal and/or real estate professions. These papers earn their scratch in substantially the same fashion as the Daily Journals, but cover smaller subscriber bases. For example, the San Jose Post-Record focuses on the San Jose legal and real estate professional market. In total, DJCO publishes 12 daily papers of this nature, in addition to a couple of industry magazines. The publishing business, called the "traditional business" by management, accounts for close to 90% of revenues and effectively all of operating profits.  [more]

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Magic Formula Weekly Roundup 6/5/2010

June 05, 2010 – Comments (0) | RELATED TICKERS: FRX , GPS , MSFT

Here are the stocks that entered, and fell out of, the official Magic Formula Investing screens used by Joel Greenblatt's value stock investing strategy as described in The Little Book that Beats the Market.  [more]

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Magic Formula Stock Review: Gymboree (GYMB)

June 03, 2010 – Comments (0) | RELATED TICKERS: GYMB.DL , CRI , PLCE

Gymboree (GYMB) is a children's clothing retailer, primarily in the United States (less than 5% of sales are outside the country). The company has 3 store concepts. The namesake Gymboree stores have 629 locations as of January, with 593 in the U.S., 34 in Canada, and 2 in Puerto Rico. Gymboree stores represent a "middle-of-the-road" price point. Sandwiching Gymboree is the firm's other two concepts - the high-end (Janie and Jack, 119 U.S. locations), and the recently launched lower-price chain (Crazy 8, 65 U.S. locations). Gymboree also runs 139 outlet stores. Janie and Jack stores usually carry apparel at about 40% higher prices than Gymboree, while Crazy 8 is priced 25-35% lower.

Clothing retail is a very easy business to understand, so let's get right into an examination of the core aspects of the company as an investment candidate - growth potential, competitive positioning, and financial health.  [more]

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Valuing Stocks: Multiple-Based Valuation

June 01, 2010 – Comments (0) | RELATED TICKERS: LMT

In last week's Discounted Free Cash flow article, I discussed the traditional and "textbook" method for valuing a stock, along with a few modifications to smooth out the inherent bumpiness in levels of cash flow. In this week's article, we'll take a look at another common way of valuing a stock, using statistical multiples of a company's financial metrics, such as earnings, net assets, and sales.

There are basically three statistical multiples that can be used in this kind of analysis: the price-to-sales (P/S) ratio, price-to-book (P/B) ratio, and price-to-earnings (P/E) ratio. All of them are used the same way in doing a valuation, so let's first describe the method and then discuss a bit about when to use the three different multiples, then go through an example.  [more]

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