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MagicDiligence (< 20)

October 2009

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Magic Formula Weekly Roundup 10/31

October 31, 2009 – Comments (0) | RELATED TICKERS: GD , GRMN

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-2009-10-31

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

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Face-Off: Pharmaceutical Distributors

October 29, 2009 – Comments (1) | RELATED TICKERS: ABC , CAH , MCK

In this first edition of a recurring series, MagicDiligence will take a number of competitors in the same industry, all current Magic Formula stocks, and compare the relative merits of investment of both the industry itself and then the individual stocks within them. Today we'll start with an industry that is practically fully represented in MFI at the time: pharmaceutical distribution.

The Industry  [more]

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MFI Stock Review: World Fuel Services (INT)

October 27, 2009 – Comments (0) | RELATED TICKERS: INT , XOM

World Fuel Services (INT) is a provider of, you guessed it, fuel and related services to the marine, aviation, and land vehicle market, which is how the company is segmented. The marine segment (55% of sales, 51% of profits) and aviation (33%, 40%) provide similar services at seaports and airports. International container and tanker fleets in marine, and airlines and cargo carriers in aviation both contract with World Fuel to provide the convenience of a single source supplier, procurement outsourcing, quality control, price hedging, logistics, offering credit, and providing ancillary services like flight plans and weather reports. In general, you can think of INT as a fuel reseller and broker, earning the lion's share of profits on the spread between fuel acquisition costs and resale pricing, as well as about 20% on other services. The land segment (12%, 9%) is similar. This division mainly serves as a wholesale gasoline and diesel provider to service stations both in the U.S. and overseas. A handful of service stations are directly operated by the company.

Growth will come mainly through acquisition and market share gains. The company has been aggressively expanding its land business, acquiring TGS (a wholesaler in the mid-west) and U.K.-based Henty Oil this past April. Both are expected to add to profits this year. A discussion of growth prospects here also dove-tails into a discussion of competitive position. World Fuel faces a lot of competitors, from small regional outfits to direct selling efforts by the oil majors like ExxonMobil (XOM). But in this market, World Fuel is one of the largest players. They benefit from a strong balance sheet and good credit controls, the opposite of which are hurting smaller competitors. This should allow the company to continue to take market share and consolidate, providing solid growth and improved competitive position.  [more]

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Magic Formula Weekly Roundup 10/24

October 24, 2009 – Comments (0) | RELATED TICKERS: CAH , OMC , PFE

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-2009-10-24

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

 

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4 "Not Quite" Magic Formula Stocks

October 22, 2009 – Comments (2) | RELATED TICKERS: AMSG , MCO , RAI

What we know for certain about the screening criteria at the official Magic Formula site is detailed in The Little Book that Beats the Market and on the site itself. The appendix in particular of Joel Greenblatt's book provides some details as to how both earnings yield and return on capital are calculated. Many (including MagicDiligence) have tried to recreate the statistics to meet those from the screen, and in general have gotten pretty close. But the exact formulas remain, like Coca-Cola (KO), a well-kept secret (the "new" official site doesn't even list them anymore).

This has led to some questions as to why certain stocks that certainly appear to have Magic Formula statistics don't appear on the screen. Using the alternative MFI screen at Magic Formula Investing EU, I've dug up and verified 4 interesting stocks that seem to have MFI statistics yet do not appear on any of the official screens. They might be worth some additional research by both MFI and value investors in general.  [more]

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MFI Stock Review: Aeropostale

October 20, 2009 – Comments (0) | RELATED TICKERS: AEO , ARO , GPS

Aeropostale (ARO) is one of the numerous teen clothing retailers you see at pretty much every decent-sized mall in America. As of August, the company operated 888 Aeropostale stores in the U.S., 38 in Canada, and 9 "P.S. from Aeropostale" concept stores in 2 states. The target demographic is the 14 to 17 year old age group, and the company utilizes its own fashions and designs exclusively. Aeropostale differentiates through targeting lower price points and using more promotional pricing throughout the year than competitors like American Eagle (AEO) or Abercrombie & Fitch (ANF).

When examining a stock in an industry like teen apparel retail, we must first consider competitive positioning. If there is a poster child for a business with very few long-term competitive barriers, it is this one (a classic "no-moat" business). There are few barriers to entry for new players outside of the capital it takes for rent, fixtures, inventory, and marketing. New entrants pop up all the time. And the inherently high returns on capital earned by many teen retailers make it a particularly attractive business to enter. Not only that, but the industry is characterized by several large existing players, all of whom have established brand appeal, large retail and distribution networks, and very strong balance sheets. Furthermore, teen fashion is very fickle, changing dramatically from one year to the next and from one generation of teens to the next. Combine this with the fact that about 40% of sales are earned in one quarter (Q4), and missing the fashion boat for even a short amount of time can leave you dragging behind your competitors or, even worse, "un-cool" in the eyes of teens.  [more]

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Magic Formula Weekly Roundup 10/17

October 17, 2009 – Comments (0) | RELATED TICKERS: ARO , SEPR.DL

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-2009-10-17

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

 

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5 Problems with a Long-term Stock Holding Period

October 15, 2009 – Comments (1) | RELATED TICKERS: DELL.DL

For most investors that seek to actively learn about the trade, one piece of advice seems to come up over and over: "invest with a long-term horizon". There are certainly many good reasons for this. For one, it is much easier to see and predict long-term business trends and advantages then it is to predict what is going to happen over the next few months or weeks (in most cases). Investing with a long-term horizon also prevents unwise speculation, avoids paying hefty commissions and taxes, and focuses the stock investor on the business fundamentals - financial health, growth potential, competitive position, price - that are key to finding winning investments.

There is tangible proof that, over the long term, investing in stocks provides the best returns of any investment vehicle. Jeremy Siegel, a Wharton professor and well known financial commentator, showed in his book The Future for Investors (MagicDiligence review) how value-based strategies such as the Dow 10 ("Dogs of the Dow") and dividend re-investment outperform the market over long periods of time. In his other, and more well-known book, Stocks for the Long Run, Siegel goes all the way back to the early 1800's to show how stocks have outperformed bonds and commodities handily over long periods of time. John Bogle, the founder of Vanguard, made his fortune espousing an indexing strategy, showing how over the long run the stock market has provided about 10-12% annual gain on investment (The Little Book of Common Sense Investing is a short, sweet read on his philosophy). No less an authority than Warren Buffett has said that "forever" is his favorite stock holding period.  [more]

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MFI Stock Review: DynCorp (DCP)

October 13, 2009 – Comments (0) | RELATED TICKERS: LLL , LMT , DCP

DynCorp is a government contractor that operates in three business segments. Global Stabilization and Development Solutions (GSDS, 36% of revenues, 30% of operating profits) provides policing and police training, security and personal protection for government officials and diplomats, and military base logistics such as electricity, water, sewage, and laundry under the recently awarded Logistics Civil Augmentation Program (LOGCAP) IV program. Global Platform Support Solutions (GPSS, 39% of revenues, 49% of operating profits) provides aircraft maintenance services, air traffic control, pilot training, and some land vehicle maintenance. Global Linguist Solutions (GLS, 25%; 20%) is a joint venture with McNeil Technologies providing interpreters and translators to the military for a variety of languages. GLS has grown from practically nothing over the past year after DynCorp won the INSCOM contract from former holder (and recent Magic Formula stock) L-3 Communications (LLL). 96% of revenue comes from U.S. government contracts. DynCorp recently went public in 2006 after being carved out of former parent Computer Sciences (CSC), but the company has a 60-year history of government contracting.

The most attractive aspect of DynCorp as an investment is the company's near-term growth potential. Winning a piece of LOGCAP IV was huge, as it could be worth tens of billions of dollars over the next decade or so. Under this contract, the company won a piece of providing services in southern Afghanistan, and there is a lot of potential for more wins there if military presence is expanded as recommended by U.S. command. LOGCAP will also provide service opportunities in Iraq, as the military transitions from LOGCAP III which was sole-sourced to competitor KBR (KBR). Also in Iraq, DynCorp is winning security service opportunities from the country's banning of former provider Xe Services (better known as Blackwater). For fiscal 2010, revenues are forecast to be up 14%, earnings per share over 25%, and 2011 is forecast to be even better. Forward earnings yield for 2010 is over 15% - a very cheap price to pay for that potential.  [more]

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Magic Formula Weekly Roundup 10/11

October 11, 2009 – Comments (1) | RELATED TICKERS: PRM.DL2 , CNU.DL2 , ONTY

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-2009-10-11

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

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Magic Formula Stocks by Relative Strength

October 09, 2009 – Comments (0) | RELATED TICKERS: BR , MYL , TRA.DL

Magic Formula stocks have performed well over the past year, and history tells us that winners do indeed keep winning. What MFI stocks have strong momentum to continue their gains going forward?  [more]

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MFI Stock Review: Dun & Bradstreet (DNB)

October 07, 2009 – Comments (0) | RELATED TICKERS: DNB , MCO , MHFI

Dun & Bradstreet (DNB) is a provider of business information with a history dating back over 165 years. Today's company has 3 business segments. Risk Management, driving about 64% of sales, provides reports and other information products that allow companies to determine creditworthiness of potential customers. This unit may best be thought of as a Moody's (MCO) or S&P (MHP) rating agency for private companies... in fact Moody's was spun off from the "old" Dun & Bradstreet in 2000. The second business unit is Supply, Sales, and Marketing (28% of sales), which provides information to help customers identify market segments, profile potential customers, build mailing lists, and evaluate current and potential suppliers. The third and final segment is Internet Solutions, consisting mainly of Hoover's, which has basic information on thousands of public and private companies, and AllBusiness.com, a resource and advice portal for business managers.

Dun & Bradstreet is a very attractive business. The company's long history, established customer relationships, high retention rates (over 90% of risk management customers renew their subscriptions), and unmatched database of 140 million business records gives this company an extremely wide moat. Although there is some competition in risk management, particularly Experian and Equifax (EFX), Dun & Bradstreet is the market leader. Two classic long-term competitive advantages apply here. One is the company's huge database, which would be nearly impossible for a competitor to build and maintain in any reasonable amount of time. Second is the "network effect". Companies want to be included in DNB's database because that is where creditors look for information, and creditors look for information at DNB because that is where the best client data comes from. These two factors together combine to create very high barriers for new competitors, and for the competitors that do exist, makes it difficult for them to gain market share. And, of course, in a market with few serious competitors, pricing usually remains rational, so the threat of a cost war is minimized. DNB's competitive position is outstanding.  [more]

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Magic Formula Weekly Roundup 10/3

October 03, 2009 – Comments (0) | RELATED TICKERS: CYTK , NTRI , AHCI.DL

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-2009-10-03

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

 

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Book Review: The Essays of Warren Buffett arranged by Lawrence Cunningham

October 02, 2009 – Comments (0) | RELATED TICKERS: KO , PG , BRK-B

Warren Buffett is a legend in the investing world. He's been called "The World's Most Successful Investor" for good reason. Currently the world's second richest man, with a net worth exceeding $40 billion dollars, his fortune has been built almost exclusively through business acquisition, both entire companies and equity positions. Buffett started as a disciple of value investing legend Ben Graham, the author of The Intelligent Investor, which Buffett has called the best book on investing ever written. He formed several partnerships in the late 1950's, and in the mid-1960's acquired New England textile manufacturer Berkshire Hathaway (BRK-B). Eventually, he and his partner Charlie Munger morphed Berkshire into an investment vehicle, acquiring excellent businesses like See's Candy and GEICO insurance as well as stock positions in large companies like Coca-Cola (KO) and Gillette (PG), among others.

Every year, Buffett personally pens an annual letter to shareholders in which he reviews Berkshire's results, opines on current events, and drops interesting stories and thoughts that expose his and Munger's incredibly successful investment strategies. Although one could certainly read each of these letters in their entirety, in many cases the individual business reviews are not of particular interest to those who don't hold Berkshire shares. The real gems in these annual letters are Buffett's thoughts on business and investing. Lawrence Cunningham recognized this, and has compiled Buffett's notes and organized parts of them by topic. The Essays of Warren Buffett is simply that - straight from the hand of Warren Buffett, but organized in a cohesive manner, with wisdom from several years put together by topic.  [more]

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