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MagicDiligence (< 20)

December 2008

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Magic Formula Year in Review 2008

December 29, 2008 – Comments (0) | RELATED TICKERS: UNTD , HPQ , SCSS

A look at the Magic Formula screen's performance and individual winners, losers, and events in 2008.

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(this article contains tables and lists which do not format well in CAPS blogging system)

 

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Magic Formula Weekly Roundup 12/27

December 27, 2008 – Comments (2)

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

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Magic Formula Stock Review: EMCOR Group (EME)

December 26, 2008 – Comments (0) | RELATED TICKERS: EME

EMCOR Group is a construction contractor that handles installation and maintenance of several building systems, including electrical, HVAC, plumbing, and communications. Some examples of projects EMCOR might handle include: lighting systems, security systems, telephone/internet, ventilation, and so forth. The company primarily services commercial, industrial, and municipal customers - not residential. There is a decent mix of revenue sources here. Last year, about half of EMCOR's revenues were from new construction projects, while a quarter were from renovation and another quarter from maintenance contracts.

There's a lot to like here, starting with the general growth strategy. Management has been trying to move the company away from the heavily cyclical commercial construction market. By focusing on growing maintenance contracts, EMCOR has been able to build a solid base of stable and recurring revenue. Management has also been pointing the company towards the most attractive growth markets. The U.S. oil and gas refining industry has seen almost no new construction in the past 30 years, making maintenance and renovation of the existing facilities of utmost importance. In 2007, EMCOR purchased Ohmstede, a company specializing in refinery maintenance. Ohmstede's business is higher margin than EMCOR's legacy businesses and should be a strong driver of top and bottom line growth over the next several years. Lastly, the incoming Obama administration has floated plans to spend several hundred billion dollars on infrastructure projects, which will lead to more contract opportunities for construction firms like this. The bottom line: there are ample growth opportunities in addition to a solidifying base of recurring revenues.  [more]

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Book Review: Warren Buffett and the Interpretation of Financial Statements

December 22, 2008 – Comments (2) | RELATED TICKERS: KO , MCO , GM

The search for companies with durable competitive advantages, or "wide moats", is an investing strategy behind the greatest investing fortune of our time, that of super-investor Warren Buffett. It is also the mission of MagicDiligence. The Magic Formula screen separates out companies with excellent current return on capital, but is that excellent figure durable? Can it be repeated 2, 5, 10 years from now? Will it stand up against current and future competition? Applying Warren Buffett's techniques is of key importance, so I was excited to see the new book Warren Buffett and the Interpretation of Financial Statements finally released recently. Let's see if that optimism was warranted or not!

The book is authored by Mary Buffett and David Clark, who have written several other books on Buffett, including Buffettology and The Tao of Warren Buffett. MagicDiligence reviewed Tao recently, and although light on investing specifics, it was full of wisdom and fun to read.  [more]

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Magic Formula Weekly Roundup 12/20

December 20, 2008 – Comments (0) | RELATED TICKERS: ACN , XOM , NSM

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

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Magic Formula Stock Review: Manpower (MAN)

December 18, 2008 – Comments (0) | RELATED TICKERS: MAN

Manpower (MAN) is one of the largest temporary employment providers in the world, placing over 5 million jobs with more than 400,000 customers in 2007. The company's massive network includes over 4,500 offices spanning the globe. The vast majority of revenues (90%) are outside the United States, primarily in France (36%) and the rest of Europe (34%). Italy (7%) also contributes a meaningful amount of business. The company places hires mainly in industrial industries, but also has a large presence in office staffing. In addition to the core staffing business, Manpower has diversified into the related fields of employee candidate evaluation, support for transitioning employees, training, and even handling the outsourcing of entire HR departments.

Staffing as an industry does not have the most attractive economic qualities. The demand for temporary help is heavily dependent on macroeconomic conditions. When the economy is in recession, staffing demand declines in excess of the economy at large (the reverse is true as well). The business is also one with very low barriers to entry, which leads to an ultra-competitive market that drives down prices and squeezes margins to razor thin levels. Some market analysts estimate that as many as 15,000 companies participate in this business! These pressures can be seen on Manpower's financial statements. Even in good years, operating margins barely crack the 4% barrier (free cash margins top out in the mid-1% range). In recessionary years, operating margins dip to near 2%, and free cash margins are barely positive at about 0.5%. 5-year average MFI return on capital is an unimpressive 28% (most Top Buys maintain a 50% or above number).  [more]

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Top 20 Magic Formula Stocks by Cumulative Value Statistics

December 15, 2008 – Comments (0) | RELATED TICKERS: NOC , PACR , WDC

Putting it all together, here are the top 20 Magic Formula stocks ranked by a combination of price/sales, price/book, dividend yield, and relative strength. All of these measures have been shown to lead to outperforming stock picks.

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Magic Formula Weekly Roundup 12/13

December 13, 2008 – Comments (0) | RELATED TICKERS: DELL.DL , CSCO , INTC

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

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Magic Formula Stock Review: Nucor (NUE)

December 11, 2008 – Comments (1) | RELATED TICKERS: NUE , X , MT

It's hard to imagine a less attractive business than the production of steel. Steel is a commodity - that is, there is no differentiating feature of the product amongst competitors, other than price. A steel beam is a steel beam is a steal beam, regardless if it comes from Nucor (NUE), US Steel (X), or Arcelor Mittal (MT). Like most commodities, the price of steel has been quite erratic over history due to the extreme fragmentation of providers. Commodity production is usually a business with low barriers to entry, and when you have a lot of competitors, it's very likely that a few will price product irrationally, destroying profits for all players. Add to the commodity aspect of steel the fact that it takes a lot of heavy and expensive equipment to run the mills. This leads to high capital expenditures to both maintain existing operations and to increase capacity. Foreign competition, with it's low labor costs, is a major threat. At first blush, this does not look like an industry that meets many of the criteria that leads to competitive advantages, and by extension the MagicDiligence Top Buys list.

However, Nucor has long been a company that has flourished in a difficult market. The company has not reported a quarterly loss in over 40 years, despite numerous large and small competitors disappearing from the scene (Bethlehem Steel being the most visible example). Nucor has averaged nearly 45% MFI return on capital over the past 5 years, excellent for any large firm. Free cash flow margin is a very respectable 9%. Growth in sales, profits, and dividends has also been great over the past 10 years, rising at a compound annual rate of 17%, 23%, and 20%, respectively. If the proof is in the pudding, Nucor's numbers seem to indicate that this is indeed a firm with some durable competitive advantages in a tough industry. So how have they achieved this?  [more]

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Top 20 Magic Formula Stocks by Price/Book Ratio

December 08, 2008 – Comments (2) | RELATED TICKERS: IBAS , NOV , HURC

Price-to-Book ratio is a well known value metric utilized by several notable value investors, most famously Benjamin Graham. This article shows the top 20 current Magic Formula stocks with the lowest price-to-book ratio. All 20 sell for below net asset value.

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Magic Formula Weekly Roundup 12/6

December 06, 2008 – Comments (0) | RELATED TICKERS: CSCO , NOV

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

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Magic Formula Stock Review: GameStop (GME)

December 04, 2008 – Comments (1) | RELATED TICKERS: GME , MSFT , BBY

GameStop is the world's largest retailer of video gaming software, hardware and accessories. The company acquired competitor Electronics Boutique in 2005 and now operates over 5,000 locations, including over 1,000 outside of the U.S. GameStop has very strong market share in the huge video gaming market, garnering 22% of all industry sales in 2006. While the stores sell new games and consoles, GameStop also focuses on buying and re-selling used games. This has been a lucrative business. Used game sales generate a 50% profit margin compared to about 20% for new games. As a result, used game sales generate 40% of GameStop's profits, despite contributing only 25% of revenue.

This stock has been popular with the growth crowd over the last few years, and rightfully so. Store count has exploded from just over 1,500 in 2004. This, plus the continued expansion of the market, has led to some pretty impressive growth stats. Over the past 5 years, GameStop has grown revenues at a compounded 26.7% annually, operating earnings at 42%, and free cash flow at 43%. The stock price has nearly tripled since the beginning of 2004, despite dropping over 60% from a price over $60 at this point last year.  [more]

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Top 20 Magic Formula Stocks by Price/Sales Ratio

December 01, 2008 – Comments (2) | RELATED TICKERS: STX , WDC , RSH

Several studies have shown that low price-to-sales ratio, not price-to-earnings or price-to-book, has been the most reliable indicator of outperforming value stocks. This article shows the top 20 current Magic Formula stocks with the lowest price-to-sales ratios.

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