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MagicDiligence (< 20)

The 5 Worst Magic Formula Stocks of 2012



January 04, 2013 – Comments (0) | RELATED TICKERS: ESINQ , CECO , ASYS

As promised in the 2012 review article, we'll recap the 5 individual best and worst performing stocks of Magic Formula® Investing (MFI) in 2012, along with some comments on each. The idea here is to try and identify any trends or lessons we can take from these individual stocks and apply to picking stocks from the screen going forward.

We already covered the 5 best performers. In this article, we'll cover the 5 worst performing stocks of MFI in 2012. With no further ado...

5) Career Education (CECO) - 71% loss from week 8

For-profit education stocks were pummeled in 2012, as new Department of Educationregulations, a tidal wave of bad press, and persistant unemployment drove down new enrollments by over 20% at many operators. Career Education has been hit harder than most, with most recent quarter new student starts down by 23%.

4) Amtech Systems (ASYS) - 72% loss from week 6

Amtech manufactures capital equipment for the production of solar wafers. We've discussedthe factors behind the solar industry's apocalypse in 2012, and Amtech suffered accordingly, with revenues cut in 1/3rd from 2011 levels. Amtech still carries a debt-free balance sheet, and solar still has good growth potential over the long term. It might make an interesting (but risky) bounce-back play in 2013.

3) FriendFinder Networks (FFN) - down 74% from week 8

When FriendFinder showed up in MFI back in February, MagicDiligence warned members to avoid it. That turned out to be a fruitful opinion - the stock lost 74% of its value since then! An awful balance sheet combined with a highly scrutinized business and questionable motives for taking the firm public made this one of the worst MFI stocks I've ever seen.

2) ITT Education (ESI) - down 77% from week 7

Despite a nearly 80% decline on the year, ITT continues to be in the MFI screens, as its financials have not deteriorated as rapidly as the stock price. We discussed for-profit education a few paragraphs up - for ITT's most recent quarter, new student starts were down 16%. With a stratospheric 73% earnings yield and a manageable balance sheet, this looks like another potential bounce-back candidate going forward.

1) Sino Clean Energy (SCEI) - down 95% from week 10

Most Chinese reverse take-over frauds were uncovered and removed from MFI in late 2011, but Sino slipped through the cracks. This whole situation was a huge black eye not just on MFI, but on the ability of the SEC to protect U.S. investors from massive, fraudulent operations overseas.

Lessons Learned

By the start of 2012, we had pretty good evidence that Chinese RTO stocks were to be avoided like the plague, so SCEI never entered MagicDiligence's radar. And even the greenest stock analyst would have found FriendFinder to be an awful pick.

That leaves us with the 2 for-profit education stocks and Amtech. These guys have one thing in common: government intervention. This has been a recurring theme. In 2011, home healthcare stocks suffered the same fate. I've been giving extra scrutiny to the possibility of government intervention in the businesses of potential picks as a result. The real ones to watch are companies that rely on government entitlements or grants to thrive - I'm less worried about firms that supply core government operational support like defense or civil services.

Disclosure: Steve owns no stocks referenced here.


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