Magic Formula Stocks by Relative Strength
The MFI strategy continues to deliver winners in more recent time periods as well. Consider the period from one year ago to today, a typical holding period in MFI. These are the returns you could have had from buying into a Magic Formula position and holding for the recommended one year period (these results compiled with the MFI Historical Performance Tool using 2 screens, the top 100 over 50 million and top 50 over 2 billion):
Best 10 Magic Formula Performers from 1 Year Ago
Considering the S&P 500 is only up about 7% from a year ago, there are some impressive returns on there. Of course, no strategy is without its laggards, and MFI has these as well:
Worst 10 Magic Formula Performers from 1 Year Ago
|KYCN||Keystone Consolidated Industries||8.75||4.2||-52.00%|
|CHCG||China 3C Group||1.1||0.57||-48.18%|
|KHD||KHD Humboldt Wedag||17.51||10.23||-41.58%|
|CITP||COMSYS IT Partners||8.05||6.18||-23.23%|
|WFR||MEMC Electronic Materials||20.69||15.96||-22.86%|
But all in all, MFI has done very well over the past year. If you would have chosen from the Top 100 over 50 million screen early last October, on average your MFI picks would have appreciated 25% a pop, outperforming the S&P by 19%, with a 67% chance of each pick earning positive returns. If you played it more conservative and stuck to the large cap, Top 50 over 2 billion screen, you would have done even better, with an average position gain of 30% (24% better than the market), and a staggering 84% chance of earning positive returns. Clearly, MFI has been a great strategy over the past year, and historical back-testing shows it to be a winner long-term, as well.
So which are the most attractive MFI stocks for this upcoming year? Well, there are many ways to try and filter them down farther. One is to do some old-fashioned fundamental and empirical research on them. Additionally, we could add some additional mechanical metrics that have been shown to find outperforming stocks in the past. A great source for this is the "Bible of Back-testing", James O'Shaughnessy's What Works on Wall Street (book review here). One conclusion from his studies was that adding 12-month relative strength to value based screens like MFI greatly improved results one year later. He defined relative strength simply as the trailing 12-month return for that stock, indicating strong price momentum. The Wall Street axiom "winners keep winning" seems to have validity, according to O'Shaughnessy.
Using that knowledge, let's have a look at the top 10 current Magic Formula stocks with the best trailing 12-month performance (the three screens used are the top 50 over 50 million, top 50 over 1 billion, and top 30 over 3 billion).
Current MFI Stocks with Strongest Trailing 12-month Performance
|VM||Virgin Mobile USA Inc||1.29||4.84||275.19%|
|INT||World Fuel Services Corp||19.18||49.3||157.04%|
|TRA||Terra Industries Inc.||18.75||34.44||83.68%|
|SHAW||Shaw Group Inc. (The)||18.02||31.05||72.31%|
|GNI||Great Northern Iron Ore Properties||55||91.62||66.58%|
|BR||Broadridge Financial Solutions Inc||12.7||20.28||59.69%|
These could make interesting choices considering the historical record. However, it reasons to stand that stocks that have not done well over the past year may be oversold. The following lists the current MFI stocks with the worst trailing 12-month results. Are they oversold? Or is there justifiable reasons for their price decline? Doing your MagicDiligence could help answer those questions!
Current MFI Stocks with Weakest Trailing 12-month Performance
|MTXX||Matrixx Initiatives Inc||16.47||5.61||-65.94%|
|JTX||Jackson Hewitt Tax Service Inc||13.9||4.82||-65.32%|
|KHD||KHD Humboldt Wedag International Ltd||17.51||10.23||-41.58%|
|PTIE||Pain Therapeutics Inc||8.79||5.38||-38.79%|
|LMT||Lockheed Martin Corp||99||74.03||-25.22%|
|QCOR||Questcor Pharmaceuticals Inc.||6.92||5.52||-20.23%|
|WTW||Weight Watchers International Inc.||31.57||26.45||-16.22%|
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