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MagicDiligence (< 20)

December 2009

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Magic Formula Stock Review: Weight Watchers (WTW)

December 31, 2009 – Comments (0) | RELATED TICKERS: WTW , NTRI

Weight Watchers (WTW) is one of the largest and best known weight-management firms in the world, capturing nearly 3% of the huge and very fragmented $55 billion dollar market. Weight Watchers' business centers around weekly meetings that help educate and provide group support for those trying to lose weight. 1.4 million people attend Weight Watchers each week, about 50,000 meetings. Each meeting is run by a "classroom leader" employed by the company, teaching and motivating clients, who either pay on a per-visit or monthly basis. 60% of Weight Watchers' sales come from meeting fees.

Additionally, Weight Watchers sells products such as food, books, scales, and so forth, making up 22% of sales. Online sales from Weightwatchers.com make up 12%, and the balance is made up of brand licensing and royalties from the company's remaining franchisees. The company has been moving away from a franchise model for some time, opportunistically buying up franchisees, and currently company-owned centers account for 82% of meeting attendance.  [more]

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Does Magic Formula Investing Provide International Diversification?

December 29, 2009 – Comments (0) | RELATED TICKERS: UEPS , IDCC , CEB

International diversification is one of the most often cited piece of portfolio advice from financial planning experts. In his book The Future for Investors (MagicDiligence review), Wharton professor Jeremy Siegel describes how younger demographic population trends in emerging economies like China and India will eventually shift the center of worldwide economic power eastward. In light of this, and the fact that U.S. investors have about 85% of assets invested in domestic companies, he and many others recommend that 30-40% of your stock portfolio should consist of foreign companies, or companies generating a significant amount of revenue from outside of North America.

The primary reason for not ignoring foreign companies is the faster growth in these markets. While creating and expanding new product and service categories is one way to grow, it is much easier to ride the "rising tide" of macro-economic growth, profiting as large numbers of formerly uneducated people go to school, start businesses, make money, and (most importantly) start buying goods and services they could not afford before. Have a look at the nominal GDP growth of the "BRIC" (Brazil, Russia, India, China) countries against the United States for most of the past decade (2000-2008):  [more]

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Magic Formula Weekly Roundup 12/26

December 26, 2009 – Comments (0) | RELATED TICKERS: LLY , GME , GIGM

Weekly roundup of stocks moving in and out of Joel Greenblatt's Magic Formula Investing screen.  [more]

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Magic Formula Stock Review: PRG-Schultz International (PRGX)

December 22, 2009 – Comments (0) | RELATED TICKERS: PRGX , WMT

PRG-Schultz International (PRGX) is an audit recovery service firm, providing services to customers in over 25 countries. The company's primary business is the auditing of accounts payable to find over-payments to vendors or providers, usually due to the increasingly complex nature of promotional activities in the retail and wholesale industries which comprise the vast majority of PRG's customers. Finding and obtaining reimbursements for these over-payments provide its clients with meaningful cash flow. Generally, PRG enters into contracts with clients for a defined period of time, and earns revenues as a percentage of amounts recovered. 43% of revenues are earned from business outside the United States.

PRG-Schultz is a very cheap stock, with a near-19% trailing earnings yield and over 16% against 2010 estimates. New management has done a good job improving earnings from a historically unprofitable position, and Magic Formula-adjusted return on capital is currently an excellent 148%. Therefore, I believe the company is a good choice for MFI investors. However, I'm holding back from adding it to the MagicDiligence Top Buys portfolio due to concerns over growth prospects. Let us have a look at that, in addition to the other discussion points on competitive position, financial health, and risks.  [more]

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Magic Formula Weekly Roundup 12/19

December 19, 2009 – Comments (0) | RELATED TICKERS: LLY , CF , TRA.DL

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

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Comments on Joel Greenblatt's Presentation to Value Investing Congress 2009

December 17, 2009 – Comments (0) | RELATED TICKERS: MAXY.DL , RL

On October 19th, Joel Greenblatt, the author of The Little Book that Beats the Market and the father of Magic Formula Investing (MFI), gave a presentation to the Value Investing Congress concerning the Magic Formula and his related venture, Formula Investing. There was some interesting data and questions during the presentation that are of interest to any MFI adherent. Check out the video and related slides at the links below:

Joel Greenblatt Presentation Video  [more]

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Magic Formula Stock Review: McKesson (MCK)

December 15, 2009 – Comments (1) | RELATED TICKERS: MCK , ABC , CAH

McKesson (MCK) is one of the major pharmaceutical and medical supplies distributors in North America, and also one of the top providers of healthcare software services. The company has two divisions. The first is Distribution Services (97.1% of fiscal 2009 revenue, 73.5% of profits). This segment supplies both small independent and large national pharmacy chains with drugs, as well as health and beauty care products. The division also has a medical-surgical distribution arm, supplying doctor's offices and care facilities with general supplies like rubber gloves, surgical soap, and so forth.

The second division is Technology Solutions (2.9% of revenues but over 26% of profits). The software solutions developed and sold by this division are diverse and cover healthcare related tasks ranging from clinical data management to financial planning and supply chain management. Customers include hospitals, independent physicians and practices, home care providers, and pharmacies.  [more]

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Magic Formula Weekly Roundup 12/12

December 12, 2009 – Comments (0) | RELATED TICKERS: HRB , TKLC , MHFI

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

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MFI Stock Review: ValueClick (VCLK)

December 10, 2009 – Comments (1) | RELATED TICKERS: CNVR , GOOGL , MSFT

ValueClick is one of the largest pure Internet advertising agencies. The company has 4 primary operating segments. The largest is the Media business (more than 50% of sales), which creates Internet-only ad campaigns for its customers, and distributes the ads through search, e-mail, and a network of over 15 thousand web sites, reaching over 80% of all U.S. internet users, a reach second only to Yahoo! (YHOO). The Affiliate Marketing business (~20% of sales) allows advertisers to use their own ad creatives to build an affiliate network using publishers that receive commissions through ValueClick. The company probably runs the largest affiliate marketing program in the world through their Commission Junction subsidiary. The third unit is Comparison Shopping (25% of sales), which runs the Smarter.com and Pricerunner.com comparison shopping sites allowing consumers to research and compare products and prices. Last and least is the Technology (Mediaplex) unit (5% of sales), which provides software tools for both advertisers and publishers to track the efficiency of ad campaigns.

Internet marketing is a great business model, and ValueClick's MFI return on capital figures illustrate this. Over the last 5 years the company has averaged nearly 150% MFI return on capital, and even in weakening conditions over the past year it still sits at 140%. These numbers probably put it in the top 1% of all public companies. Very little capital investment is needed to grow revenues, and low fixed costs make it easier to pare down expenses when revenues are weak, a nice attribute with a revenue stream as heavily cyclical as ad spending. ValueClick has an outstanding balance sheet too, with 159 million dollars in cash and no debt. This, plus a very healthy free cash flow margin of 15%, allow management to provide shareholder value in numerous ways, from acquiring new businesses to buying back shares. Financially, there are zero concerns.  [more]

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Calculate Magic Formula Statistics for Almost Any Stock

December 07, 2009 – Comments (0) | RELATED TICKERS: KO , JNJ , PPD.DL

One of the most common questions from followers of Joel Greenblatt's Magic Formula Investing (MFI) strategy is how exactly to calculate the earnings yield (EY) and return on capital (MFIROIC) used to produce the rankings on the official MFI site. The "bible" of MFI, Greenblatt's The Little Book that Beats the Market, provides the only detailed explanations in the first appendix. In the previously linked articles, MagicDiligence has provided some explanations and examples to help investors calculate the statistics for any stock.

However, even with this information it is a slow process to gather the data and do the calculations. The original MFI site at least provided an earnings yield number and a range for return on capital... the new one provides neither, just a list of stocks. There are some alternative MFI-like screens that provide an approximation of the EY and MFIROIC (see the new tools page). Even with these it sometimes isn't possible to find the statistics for a particular stock that interests you.  [more]

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Magic Formula Weekly Roundup 12/5

December 05, 2009 – Comments (0) | RELATED TICKERS: LLL , LLY , CBST

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

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MFI Stock Review: Nathan's Famous (NATH)

December 03, 2009 – Comments (2) | RELATED TICKERS: NATH , MCD , YUM

Think back to the summer. Every backyard barbecue comes with at least 2 staples: hamburgers and hot dogs. So why is it, that when you drive into town for fast food, you can find half a dozen burger joints but are lucky to find one that serves a decent hot dog? I had never really thought much about this before looking into Magic Formula small-cap Nathan's Famous (NATH).

When you think about it, Nathan's largely owns the quick-service hot dog niche. The company is well-known even outside of its native metropolitan New York home territory, thanks largely to the Nathan's Famous Hot Dog eating contest broadcast every year on ESPN (DIS) from Coney Island. Try typing "hot dogs" into Google (GOOG) - the second hit is Nathan's website (after Wikipedia, naturally)! This brand recognition has allowed management to pursue a markedly different strategy from most competing fast-food chains.  [more]

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The Forbes Best 200 Small Companies List, Ranked in Magic Formula Fashion

December 01, 2009 – Comments (0) | RELATED TICKERS: AMSG , JCOM , PPD.DL

A couple of weeks ago, MagicDiligence looked at MFI stocks in the Forbes' Best 200 Small Companies for 2009 list. In producing that article, I thought it would be interesting to take these 200 firms as a "universe", calculate MFI earnings yield and return on capital statistics for each, and then rank them to get a Magic Formula-style list of which ones are the best combination of cheap and high quality.

The recent break gave me a chance to do just that. Before we get to the list, though, a few things should be mentioned. The first is that some current official MFI stocks are not that highly rated here, though most are. The main reason for this is how different data providers treat operating expenses. For example, InterDigital (IDCC - a current MFI stock) has $37 million in one-time restructuring fees in the past 12 months that are technically operating expenses but should be treated as non-operating for MFI purposes. The data feed used for this project included them, leading to its relatively low ranking. Also, Joel Greenblatt's exact recipe for calculating MFI statistics is unknown. The numbers below use MagicDiligence's approximations for earnings yield and MFI return on capital.  [more]

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