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MagicDiligence (< 20)

September 2009

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MFI Stock Review: United Online (UNTD)

September 29, 2009 – Comments (0) | RELATED TICKERS: UNTD , FLWS

United Online (UNTD) is a sort of "mini-conglomerate" with three lines of business. The first, FTD, markets floral and gift products over the internet (www.ftd.com) and through a toll-free telephone number (1-800-SEND-FTD), and these orders are then fulfilled by one of the company's large network of local florists. While FTD is a U.S. concern, the subsidiary also has a similar business in the U.K. and Ireland known as Interflora. FTD provided 57% of United Online's revenue in the most recent quarter and was only acquired by the company a year ago.

The second line is the online social networking and loyalty marketing, namely Classmates (www.classmates.com) and MyPoints (www.mypoints.com). Classmates is a 50 million strong social network organized mainly by academic institutions attended. While most members just list their information with a free account, a paid account is required to contact former acquaintances. MyPoints is a "pay to click" site where people get points towards rewards for taking surveys, responding to email offers, and so forth. This business segment delivers around 22% of total revenues.  [more]

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Magic Formula Weekly Roundup 9/26

September 26, 2009 – Comments (0) | RELATED TICKERS: MSFT , LH

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

Read the full article at:

http://www.magicdiligence.com/articles/weekly-roundup-2009-09-26

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

 

 

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MFI Stock Review: Questcor Pharmaceuticals (QCOR)

September 25, 2009 – Comments (1)

Questcor Pharmaceuticals (QCOR) produces and markets for all practical purposes a single product: H.P. Acthar Gel. Acthar is an injectable treatment for inflammatory disorders, particularly multiple sclerosis (MS) and infantile spasms (IS) in children. The company also markets Doral for insomnia, but Acthar contributes about 99% of all revenues, making an analysis of Questcor equivalent to an analysis of the outlook for sales of Acthar.

The drug, and its relationship with this company, have an interesting history. Acthar is not a new drug - it was first synthesized way back in the 1940's from pig pituitary glands. Eventually the drug was owned by Aventis, which nearly discontinued production in the mid-1990's due to poor sales. However, pediatricians objected, as there were few choices for treating IS, and Acthar was (and still is) the first option for treatment. Questcor acquired the rights to Acthar in 2001. With such low volumes and a low price, Acthar did not provide many benefits to Questcor. The company continued to be unprofitable.  [more]

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Three Points of Investment

September 22, 2009 – Comments (0)

Joel Greenblatt's Magic Formula Investing (MFI) strategy is a very simple but very effective design. The two screen components are earnings yield (basically the inverse of P/E, using operating earnings) and return on capital. Stocks with a high earnings yield indicate that they may be under-priced based on past levels of profitability. Stocks with high returns on capital indicate good businesses - ones that possess some kind of competitive advantage, be it structural or managerial, that allows them to earn outstanding returns on shareholders' capital. Combine the two and you get "good companies at cheap prices" - a winning investment recipe, proven through numerous back-tested studies to outperform the market at large.

However, any experienced investor can spot obvious frauds just by perusing the top 50 stocks on the official MFI screen for any given day. Simply because of the way the MFI screen components are calculated, imposters can find their way into the list. Some examples of these imposters are: heavily cyclical commodity stocks after a boom period; fad stocks with no second act that have outlived their year or 2 in the sun; declining businesses in run-off mode with little hope of future growth; and firms that grow exclusively through expensive and risky acquisitions that are hidden by the MFI tactic of removing goodwill assets from return on capital calculations.  [more]

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Magic Formula Weekly Roundup 9/19

September 19, 2009 – Comments (0) | RELATED TICKERS: MSFT , LH , CNVR

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

Read the full article at:

http://www.magicdiligence.com/articles/weekly-roundup-2009-09-19

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

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Magic Formula Stock Review: Corus Entertainment (CJR)

September 16, 2009 – Comments (0) | RELATED TICKERS: CJR.DL

Corus Entertainment (CJR) is one of Canada's largest media and entertainment companies. Generally speaking, Corus operates two business segments. Radio (about 20% of operating profit) consists of 53 radio stations across Canada, covering a variety of music genres and station formats, making it the second largest radio operator in the country after Astral Media with about a 28% market share. The second segment is Television (80% of operating profits), which can be further broken down into specialty and premium television networks (channels) and content creation. On the channel side, Corus completely or partially owns some well-known networks such as TELETOON, YTV, W Network, Movie Central, and Encore Avenue. Corus also owns a handful of broadcast TV stations. On the content side, the most valuable subsidiary is Nelvana, which is responsible for some well-known children's properties that are distributed over kids' networks such as Nickelodeon and Disney Channel. Parents of preschoolers no doubt recognize some of Nelvana's roster, which includes The Backyardigans, Franklin, and Babar, among others. These content assets also allow Corus to run some small merchandising and publishing operations that are based upon them (like toys, clothing, books, etc.).

Historically, media businesses were great investments. There is only a limited band of broadcast frequencies, and in the past owning some of these represented a long-term competitive advantage. These advantages are all but gone in the current digital era. Terrestrial free radio has been a dying business, particularly with the advent of iPods and satellite radio. The same can be said of network television, which faces even more competition from cable, satellite, video-on-demand, DVDs (and now Blu-Ray), and the Internet. Also, since both of these business models rely primarily on advertising for revenues, they were subject to big sales losses during recessions, as advertising dollars are often the first place businesses in stress cut back spending. This part of Corus is not very attractive going forward.  [more]

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Magic Formula Weekly Roundup 9/12

September 12, 2009 – Comments (0) | RELATED TICKERS: DELL , UEPS

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

Read the whole article at:

http://www.magicdiligence.com/articles/weekly-roundup-2009-09-12

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

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Magic Formula Stock Review: CGI Group (GIB)

September 09, 2009 – Comments (0) | RELATED TICKERS: GIB , ACN , IBM

CGI Group is Canada's largest IT consulting firm, based in Montreal, and dominates the consulting market for most of the top-shelf Canadian companies. CGI's services are concentrated into three basic areas: consulting, systems integration, and business process outsourcing. The company has focused on a few well-defined industries to target their services, namely financial services, telecommunications, retail, manufacturing, and healthcare. The largest geographic contributor to revenues is Canada, although the U.S. market provides about a third of sales (CGI entered the U.S. in 2004).

Consulting and outsourcing is a huge market with a lot of nooks and crannies and an absolute tidal wave of competition. CGI Group focuses mainly on large scale systems integration and their outsourcing contracts, which puts them into direct competition with some large competitors like Accenture (ACN), IBM (IBM), Computer Sciences (CSC), and others. A durable competitive position in such a competitive and (in many cases) discretionary market is difficult to achieve. One of CGI's biggest disadvantages is a lack of presence in cheap labor geographies where outsourcing things like call centers and IT support can be done inexpensively. Less than 10% of the work force is located in these regions, putting CGI at a disadvantage against a truly global player like Accenture. And CGI's only real geographic advantage is in Canada, where established relationships favor it. Additionally, some competitors provide their own hardware solutions, which creates customer lock-in potential (and add-on profits) that CGI cannot boast.  [more]

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Debt Analysis Example: Deluxe Corp (DLX)

September 04, 2009 – Comments (0) | RELATED TICKERS: DLX

In the previous article, Debt in Business Analysis, MagicDiligence did an overview of analyzing a prospective investment's debt burden. In this article, we'll go through a Magic Formula example that covers a lot of the bases: Deluxe Corporation (DLX).

Before we begin, it's important to set a context for analyzing the debt. Is this a heavily cyclical company that suffers huge swings in revenue and profitability over short periods of time, or does it have fairly stable sales and profit margins? What is the near and medium term prospects for earnings growth? These are both important points - cyclicals and declining businesses obviously are riskier if they have worrisome debt burdens.  [more]

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Debt in Business Analysis

September 01, 2009 – Comments (2) | RELATED TICKERS: MCO , MHFI , DLX

One of the most important things to look at when analyzing a prospective investment is the financial health of the business. Companies with a lot of debt and little cash flow are candidates for bankruptcy, leaving your investment worth nothing, regardless of how much you paid per share of stock. On the other hand, strategic debt can often help greatly improve a business's growth rate, and is almost required for start-up and early-stage companies. In this article, I'll go over 5 basic questions related to analyzing a company's debt burden, including what it is, and what is good or bad debt. In a follow up article, I'll go through a Magic Formula example to illustrate the process.

1) What kinds of debt do businesses use?  [more]

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