October 20, 2014

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Magic Formula Stocks on the Move 10-20-2014

A couple of new magic formula stocks this week. I was on travel but i’m getting ready for my November purchase. Apple (AAPL) just reported its earnings after the bell and is now a triple digit stock once again. I thought it was a bit interesting as it just moved out of the magic formula a couple of weeks ago.

In:

  • Oracle (ORCL)
  • Syntel (SYNT)

Out:

  • Kellogg (K)
  • Symantec (SYMC)

Disclaimer: None

 

October 17, 2014

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Perfect timing, not

I decided to start my magic formula portfolio at just the right time, or not. Seems like I caught the absolute top. Actually, I knew the market indexes have had a nice run the past couple of years with very few interruptions and the odds of a bumpy road ahead were a bit high. I decided to proceed anyway. Why? For one, the magic formula system is not a timing system. What if I sit around trying to time the perfect entry only to see markets rally? That’s not value investing and for sure, that’s not magic formula investing.

So what i’m I doing?

Nothing. Actually, I rarely look at the market throughout the day. My lunch is at 12 PST so maybe I will come online towards the closing bell and take a sneak peak at the headlines. But otherwise, I stick with the magic formula and go about my business. EBOLA, Russia & Ukraine, ISIS, the Fed, Oil Crashing, Analyst upgrades and downgrades, etc. are all things the financial media use to have something to talk about and make it seem like the world is going to end.

What keeps me calm during the storm?

For one, i’m just getting started. I have one stock in my portfolio and i’m anxiously waiting to add more on the first of November. I’m secretly hoping for the stock market to fall further. Secondly, knowing that I purchased my first stock at value prices. The stock, at the time of purchase, had an earnings yield of 13.50% and Return on Capital of 58%. Not bad, but with a falling stock price, its earnings yield has now increased to almost 15%, making it a better bargain.

 

 

October 11, 2014

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Magic Formula Stocks on the Move 10-11-14

Each week I track stocks moving in and out of the magic formula screen. The screen that I use is the Top 30 stocks with a market cap of 2 Billion (2000 input) or greater. Here are the movements for the week:

In:

  • Gap, Inc. (GPS)
  • Symantec (SYMC)
  • Time Inc. (TIME)

Out:

  • Apple (APPL)
  • Maximus, Inc. (MMS)
  • Oracle (ORCL)

Disclaimer: None

October 10, 2014

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Back to Basics

Boy does time fly. The magic formula is almost 10 years old and I still look forward to screening for new magic formula stocks every weekend just like I did 9 plus years ago. In honor of the coming 10 year anniversary, I plan to re-read Joel Greenblatt’ s The Little Book the Little Book that STILL Beats the Market and share my noted with you.

I know it’s not a “heavy” read, but I really want to get in the habit of reading again and why not start small and work my way towards newer and “tougher” reads like Benjamin Graham‘s The Intelligent Investor. I”m also going to be pretty busy with work this month, so starting with the Little Book feels right.

October 9, 2014

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CTC Media (CTCM) Collapses with Russian Rubble

Ebola and ISIS has taken some of the media attention away from Russia but that doesn’t mean things aren’t getting interesting for Putin’s government as the Russian Ruble, Russia’s currency, has hit new lows due to falling oil prices. Nearly half of Russia’s government revenue is derived from oil which hit $91 on Wednesday. The currency’s drop has forced the Russian central bank to step in to at least try to slow down the currency’s decline.

With the currency at new lows, investors have sold off Russian stocks including magic formula stock CTC Media (CTCM) which now trades at levels it hasn’t seen since 2009. Naturally, the contrarian in me comes out. I wouldn’t be surprised to see several oil companies come into the magic formula screen as the database updates. In a sense, the magic formula is a contrarian strategy as you will often find stocks from sectors that are out of favor such as the education sector with the Apollo Education Group (APOL), ITT Educational Services (ESI), appearing on the magic formula screen once new legislation was approved to change how these for profit schools recruit individuals.

CTCM

With CTCM, there’s just too many question marks to be answered but the stock does appear to be cheap by magic formula measures.

Earnings Yield: 32.90%

Return on Capital: 138.50%

But there are many questions surrounding it including a new law that limits foreign ownership in Russian mass media outlets to below 20%. I won’t go into full details but if you’re into small caps, CTCM is something definitely you would want to check out. While I don’t like to get into a full blown security analysis into CTCM I do believe the street is over reacting. Keep in mind, the a pure magic formula investing system is suppose to ignore the news/fundamentals and solely rely on holding a basket of undervalued securities that earn a return on capital.

“The time to buy is when there’s blood in the streets.”- Baron Rothschild 

October 8, 2014

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Warren Buffett Sits Down with Dan Gilbert in Detroit

“You can’t produce a baby in 1 month by getting 9 woman pregnant”- Warren Buffett

I’m not the first to blog about the television interviews and articles Warren Buffett has as some people do that for a living. But as time permits, I will eventually get them up. What I have always loved about Warren Buffett and his interviews is everything is fair game. Meaning, you could ask him any question you want and he will give you his best answer. And this is certainly true with this hour long interview with Detroit businessman Dan Gilbert who has been making a name by helping rebuild downtown Detroit.

I won’t go into much detail about the one hour interview but there are a lot of investing wisdom if you pay close attention. For example, when asked about his now famous bet at the MGM, Buffett simply stated he looks for mispriced items.


October 6, 2014

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Why the Magic Formula

I bought my first magic formula stock this month for the first time in a long time. I plan to do this on a monthly basis despite what the market does, what the Federal Reserve plans to do, and whatever epidemic is out there. I’m simply following the magic formula system. It’s crazy to think the magic formula was first released almost 10 years ago and yet, I continue to follow it. Very few bloggers are left who continue to follow the magic formula and that only means one or two things: a) most people gave up on it or b) people are not sharing their results publicly, which is fine.

It’s a shame as the magic formula continues to work. The good news is, it will continue to work.  The reason individuals give up on quant based strategies  is people want instant gratification and are not willing to stick with something through the ups and downs. Another reason, like Joel Greenblatt mentions in the little book , is the magic formula is easy, it might be too easy.

So why do I continue to follow the magic formula?

For one it works. The results published in The Little Book that Beats the Market prove that it works. See for yourself.

magic formula investing results

Image credit: basehitinvesting.com

What has happened over the past couple of years? More out performance.

In May of 2012, I actually set up a virtual fund to see how the magic formula would stack up against 80,000 other wanna be fund managers and the fund has outperformed 99% of them. How much effort do I put into the fund? Very little. On the last trading day of the year, I sit down and screen the magic formula and put in the sell orders. On the first day of the year I buy the new stocks entering the screen so the fund has the same 30 stocks as the official magic formula site.

Each position is 3.33% of the fund and I use the Top 30/ 50 million screen. Below are some images of how it has been performing.

mf1

 

returns

 

rankings

 

As you can see, the fund has its up and downs but over the long run, it has done well. I have also started a large cap fund and let’s just say its off to a good start.  Actually, the large cap fund has given me the confidence to favor the large cap screen over the small cap screen, but that’s just me. Anyway, i’m confident the magic formula will continue to work. Why? It’s simple: you buy good business (ROC) that are on sale (Earnings Yield). It’s tough to argue against that.

October 6, 2014

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Magic Formula Stocks on the Move 10-6-14

Each week I track stocks moving in and out of the magic formula screen. The screen that I use is the Top 30 stocks with a market cap of 2 Billion (2000 input)or greater. Here are the movements for the week:

In:

  • Apple (APPL)
  • Maximus, Inc. (MMS)
  • Steven Madden, LMTD. (SHOO)

Out:

  • Booz Allen Hamilton Holdings (BAH)
  • Dun & Bradstreet corp. (DNB)
  • Science Applications International Corporation (SAIC)

Disclaimer: None

September 30, 2014

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Joel Greenblatt on CNBC Discussing Small and Large Caps

Joel Greenblatt, founder of the Magic Formula and Gotham Funds, appeared on CNBC on September the 23rd to discuss his buy/short sell strategy and mentions large caps in the Russell 1000 (mainly mid to large caps) have better valuations than those of the Russell 2000 in which Joel Greenblatt mentions stocks 1001-3000?

It’s a short video but followers of Joel Greenblatt know he has been using this strategy of buying the “cheapest” stocks and shorting the most “expensive” stocks for the past couple of years. It’s the same strategy he talks about in The Big Secret for the Small Investor which was released in 2011.

I won’t touch upon the names he mentions as short candidates as in previous interviews he mentions he uses leverage when the price moves against him but Greenblatt did mention 3 large caps that according to his research partner , offer value. Raytheon (RTN) is currently a magic formula stock and the other two have previously appeared on the magic formula screen.

Verisign (VRSN)

Earnings Yield: 8.10% Return on Capital : 163.47%

Verisign is interesting considering it has a monopoly in domain registration (.com, .net, .org, etc) but it also has a strong Internet Security and  IT division that delivers strong free cash flow. Warren Buffett’s Berkshire Hathaway has also been accumulating shares of Verisign and now owns roughly 10% of the shares outstanding with an average price of $46.

 

 

Raytheon (RTN)

Earnings Yield:9.30%, Return on Capital: 148.41%

A current magic formula stock along with several defense contractors, Raytheon definitely looks interesting considering the current turmoil in the Middle East.

Towers Watson & Co. (TW)

Earnings Yield: 7.70%  Return on Capital: 104.35%

I can’t remember if Towers was a magic formula or not but it’s current earnings yield is not attractive. From the three stocks, it has the lowest earnings yield and the lowest Return on Capital. It wouldn’t make sense to put money on option C, when option A & B are more attractive. An interesting point, Joel Greenblatt increased his stake in the company by almost 400,000 shares. It’s significant considering he had roughly 30,000 in the first quarter.

Disclosure: None

September 28, 2014

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Magic Formula Stocks on the Move 9-28-2014

Each week I track stocks moving in and out of the magic formula screen. The screen that I use is the Top 30 stocks with a market cap of 2 Billion (2000 input)or greater. Here are the movements for the week:

In:

  • Harris Corp. (HRS)
  • Science Applications International Corp. (SAIC)

Out

  • H&R Block (HRB)
  • Starz (STRZ.A)

Disclosure: None