Value Investing Pro » Magic Formula Investing

Getting Back On The Saddle

Alex Garcia — Tue, 22 Dec 2009 22:51:25 +0000

I’ve been a bit busy with work and school which have prevented me from updating the site like I would like to, but nevertheless the show must go on.

Thoughts on the market

Even though I might be inactive from the site, it doesn’t mean I don’t have an eye on what’s going on. I continue to look for value stocks and I continue to screen the magic formula on a weekly basis. Now, this is a scary market for a couple reasons. Number one, the market is up a tremendous amount from its March lows (about 65%). I have been saying this for a couple of months and it looks like we been stuck in neutral. Secondly, inflation is creeping up while unemployment doesn’t seem to be picking up.

Magic Formula Investing Experiments

I will be running a couple of experiments on Marketocracy.com and will be reporting on them on the site. I’m convinced the magic formula investing system works, but i’m curious if it could be broken down further and keeping the performance and automation in tact. Speaking of which, i’m starting to believe following the system as its laid out in the book is the best way to go with this. The problem I run into when waiting for fat pitches to come by is the lack there of fat pitches in a rising markets. This became extremely obvious in the past couple of months as cash became an anchor. One could then make the argument of purchasing selectively on a continuous basis. That seems to work. But, one thing I have noticed is the performance of the stocks that weren’t purchased often outperform chosen stocks. The perfect example is biotechs, which are often the first stocks to get excluded when considering a purchase due to their volatile nature. Well, these ugly monkeys might be your next double or take-over. What happens is these companies appear on the magic formula screen after a HUGE drop, usually from a blockbuster drug coming off the market, disappointing lab results, analyst downgrades,etc.. But as time goes on, management will often appeal the FDA, get back to the drawing board, discover other drugs, or get taken over. So as the positive news develop, the stock moves up quick and thus might give your portfolio a nice boost. I’ll go into more detail later in the month as I report the trades, set up the website pages, etc..

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Magic Formla Investing Strategy 1a

Alex Garcia — Mon, 07 Dec 2009 03:13:15 +0000

First of all, its quite obvious the magic formula investing strategy has its flaws. For example, a bunch of bio-techs with one products will appear on the screen every week or two. A recent trend has been Chinese companies with cooked up books or who have missed analyst expectations. Once magic formula investors figured this out, they thought they could analyze the screen on a weekly basis and choose the best stocks. In theory that should work. But as we all know, theory and practice don’t always hold hands. I will use myself as proof. Now, I consider myself a pretty good stock picker(see below).

I have been value investing for about 6 years and if there is one thing I have learned over the years is that to outperform you have to be VERY patient as bargains rarely come around. Seriously, if you see any blogger/persona/journalist, etc… recommend stocks in every post, chances are they are pulling names out of a hat, in other words, their full of it. Consider this, the magic formula investing systems screens for great companies selling at cheap prices. No secret there, but even though it screens for cheap prices, I have found about 3 undervalued stocks in the past 4 months. So if I screen for “cheap” every week, and I have found all but 4 undervalued stocks, how on Earth is someone finding undervalued stocks on a daily/weekly basis? The other thing I have learned is while value investing is simple, its definitely not easy. It takes a bunch of reading and analysis to truly understand a company and then you have to pray to the gods that its undervalued, something that happens in these kind of markets.

Then comes the curveball, the magic formula doesn’t work at all times. Yikes!!! what does an investor do? a) stick with the system b) keep it automated. Yup, don’t try to pick the winners. Stick with the magic formula system as it is laid out in the “little book”. I have been pretty inactive in the past month or two. Part of it is due to school. The other half is due to business. So considering my time is constrained, I went fully automated and cringed at the thought of buying bio-techs and unknown Chinese companies. But there’s an upside to this automated system. First, the magic formula doesn’t work at all times. Secondly, you have to accept the fact that these magic formula stocks are cheap for a reason, very rarely will you find a Bentley in a sea of Toyota’s. Third, and probably the most overlooked, what might be a dog, could very well be a tiger. By that I mean, that stupid bio-tech that you bought with your eyes closed, could double in the next year as it goes through legal issues, new products,etc… How do I know? I have seen hundreds of companies go though the magic formula system. What looked like a bargain became a stock to forget, and what looked like a dud turned out to be gold. Don’t believe me, check out my automated magic formula fund (results below). I screen for it every month following the rules as they’re laid out in the book. I buy,sell ,repeat and that’s all I do. I can’t complain about the magic formula results.

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Magic Formula Stocks On The Move 11-14-09

Alex Garcia — Sat, 14 Nov 2009 15:02:11 +0000

Each week I track which stocks are moving in and out of the top 30 from the Magic Formula Screen. This screen in ran for companies with a minimum market cap of 50.Here are the moves for the week ended 11-14-09 on the top 30 list.
Top 30/50 Million:

In:

Continucare Corporation (CNU)
The Corporate Executive Board Company (EXBD)
Immunomedics, Inc. (IMMU)
Infinity Pharmaceuticals, Inc. (INFI)

Out:

Cubist Pharmaceuticals, Inc (CBST)
i2 Technologies, Inc. (ITWO)
Oncothyreon Inc. (ONTY)
Pervasive Software, Inc. (PVSW)

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Magic Formula Stocks On The Move 11-7-09

Alex Garcia — Sat, 07 Nov 2009 15:46:41 +0000

In:

Argan, Inc. (AGX)
Comfort Systems USA, Inc (FIX)
Cubist Pharmaceuticals, Inc. (CBST)
Lorillard, Inc (LO)
Synta Pharmaceuticals Corp. (SNTA)

Out:

BigBand Networks, Inc. (BBND)
The Corporate Executive Board Company (EXBD)
DivX, Inc. (DIVX)
Net 1 UEPS Technologies, Inc. (UEPS)
Verisk Analytics, Inc (VRSK)

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Magic Formula Stocks On The Move 10-31-09 Each week I track which stocks are moving in and...
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Magic Formula Stocks On The Move 10-31-09

Alex Garcia — Sat, 31 Oct 2009 14:12:50 +0000

In:

BigBand Networks, Inc. (BBND)
Fluor Corporation (FLR)
Net 1 UEPS Technologies, Inc. (UEPS)
Pervasive Software, Inc. (PVSW)
Sturm, Ruger & Company, Inc. (RGR)
Tessera Technologies, Inc. (TSRA)
Verisk Analytics, Inc. (VRSK)

Out:

Argan, Inc. (AGX)
Comfort Systems USA, Inc. (FIX)
EarthLink, Inc. (ELNK)
Endo Pharmaceuticals Holdings Inc. (ENDP)
Great Northern Iron Ore Properties (GNI)
Lorillard, Inc. (LO)
MIPS Technologies, Inc. (MIPS)

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Joel Greenblatt On Yahoo Tech Ticker

Alex Garcia — Fri, 30 Oct 2009 04:17:20 +0000

OK, if I keep this up, this site shall soon become a Joel Greenblatt fan site. This is the third Joel Greenblatt video that I write about in a a 2 week span (you can see Joel Greenblatt on Bloomberg or Joel Greenblatt on CNBC), but I don’t mind. For those still not familiar with magic formula investing, it’s value investing at its most basic point as it uses a combination of two ratios to find great companies at affordable prices. The metric to find great companies is return on invested capital, while earnings yield is used to find the companies at cheap prices. One then combines the two metrics together to rank these stocks from highest , the ones with the highest combined score, to lowest. That’s the basics. For the complete details, check out Joel Greenblatt’s The Little Book That Beats the Market.

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Magic Formula Stocks On The Move 10-24-09

Alex Garcia — Sat, 24 Oct 2009 14:26:59 +0000

In:

China Education Alliance, Inc. (CEU)
I2 Technologies, Inc. (ITWO)
Lorillard, Inc. (LO)
Raytheon Company (RTN)

Out:

Forest Laboratories, Inc. (FRX)
Matrixx Initiatives, Inc. (MTXX)
Terra Industries Inc. (TRA)
United Online, Inc. (UNTD)

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Joel Greenblatt Bloomberg 10-19-09

Alex Garcia — Tue, 20 Oct 2009 13:55:48 +0000

On the same day that Joel Greenblatt appeared on CNBC, he also appeared on Bloomberg. I took some quick notes on the video. I found the Bloomberg video a bit more informative as he actually talked about stocks and sectors, whereas his appearance on CNBC he was questioned more on the magic formula investing strategy.

Notes On Joel Greenblatt’s Appearance On Bloomberg

Buy a portfolio of stocks that are cheap and earns high returns on capital
Construction and Engineering Stocks come up as cheap
Don’t worry about where the market is going, worry about what you buy
There are few places to protect yourself from inflation

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Magic Formula Stocks On The Move 10-18-2009

Alex Garcia — Mon, 19 Oct 2009 14:19:43 +0000

In:

Amedisys, Inc. (AMED)
Argan, Inc. (AGX)
DivX, Inc. (DIVX)

Out:

China Education Alliance, Inc. (CEU)
I2 Technologies, Inc. (ITWO)
Lorillard, Inc. (LO)

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Required Reading For Joel Greenblatt’s Columbia Class

Alex Garcia — Sat, 17 Oct 2009 15:24:14 +0000

While Columbia Business School might be several thousand miles away from Los Angeles, it might not be too hard getting a Joel Greenblatt education from the comfort of one’s home. I found Joel Greenblatt’s Fall 2009 course syllabus online. I have a couple of these books already, it might be a good time to wipe the dust off and hit the books. Anyway, I thought it would be a nice nugget for those interested. I was thinking about what must have gone through Greenblatt’s mind when adding his books to the list, I’m guessing the script goes something like this:

Joel Greenblatt thinking to himself in his office at 11:00 p.m on a Sunday night

JG: How should I punish these kids this semester?

JG: Should I hit’em with Security Analysis, the old AND new edition?

JG: Or should I mix it up a little and add one of my books?

JG: Ah, lets throw another of my books in there, I feel good?

Required Reading For Joel Greenblatt’s Columbia Class

Greenwald, B., et al., Value Investing –– required
Haugen, R., The New Finance: (4th edition)–– required
Greenblatt, J., You Can Be a Stock Market Genius –– required
Greenblatt, J., The Little Book That Beats the Market –– required
Cunningham, L., The Essays of Warren Buffett –– required
Hooke, J., Security Analysis on Wall Street –– recommended
O’Shaughnessy, J., What Works on Wall Street –– recommended
Dreman, D., Contrarian Investment Strategies: Next Gen. –– recommended
Graham, B., The Intelligent Investor –– recommended
Plus – selections from Graham, B., O’Glove, T., Buffett, M., and more

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