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Many curious investors have tried to duplicate the Magic Formula study's results as reported in The Little Book That Beats the Market, to mixed results. While most that have tried have confirmed that the strategy itself has backtested very successfully, the individual stocks used in the study largely remain a mystery. Additionally, many have tried to duplicate the screening results as seen at the official website, magicformulainvesting.com, again to mixed results. The most interesting example I've seen can be found here, along with some other strategies (look for the section labeled Greenblatt Index Scans).

This one is particularly interesting because it actually ranks the stocks in order, instead of just providing an unranked list like the official site. The financial data is pulled off of Google Finance, which uses Reuters data. The assumptions for the scan are listed at the link in the previous paragraph, but they do not seem unreasonable. To see how well this duplication matched up with the official list, I took the top 100 stocks in the "over 100 million" screen, and compared them against the top 100 over 100 million from the official site's list. The current correlation was disappointing: only 41 stocks listed in this alternative screen were also in the official one (41%). Those stocks were:

Stocks On Both Alternative and Official Screens

AEO	American Eagle Outfitters Inc.
ARP	American Reprographics Company
AYI	Acuity Brands
CHE	Chemed Corp.
CHKE	Cherokee Inc.
CITP	COMSYS IT Partners Inc.
CMTL	Comtech Telecommunications Corp.
CPSI	Computer Programs and Systems Inc.
CRDN	Ceradyne Inc.
CROX	Crocs Inc.
CSGS	CSG Systems International Inc.
DLX	Deluxe Corp.
DTPI	Diamond Management & Technology Consultants Inc.
EGY	VAALCO Energy Inc.
ELNK	EarthLink Inc.
HANS	Hansen Natural Corp.
HLYS	Heelys Inc.
HURC	Hurco Companies Inc.
IAR	Idearc Inc.
ICFI	ICF International Inc.
JAKK	JAKKS Pacific Inc.
KCI	Kinetic Concepts Inc.
KFRC	Kforce Inc.
MHP	McGraw-Hill Companies Inc.
MLHR	Herman Miller Inc.
NTRI	NutriSystem Inc.
NVTL	Novatel Wireless Inc.
OMPI	Obagi Medical Products Inc.
PACR	Pacer International Inc.
PCU	Southern Copper Corp.
PDX	Pediatrix Medical Group Inc.
PPD	Pre-Paid Legal Services Inc.
RHI	Robert Half International Inc.
RSH	RadioShack Corp.
SNCR	Synchronoss Technologies Inc.
THO	Thor Industries Inc.
TPX	Tempur-Pedic International Inc.
TRA	Terra Industries Inc.
TRID	Trident Microsystems Inc.
VPHM	ViroPharma Inc.
WON	Westwood One Inc.

Well, at least we can be sure that any stocks in the above table truly meet the low-cost, high return on capital requirement! But that leaves 59 stocks on the alternative screen that are not on the official one - a solid majority. Looking over this list, it occurred to me that many of them have appeared on the official screen in the recent past. This indicates that they currently are falling just outside of the cutoff (like, perhaps, in the 101-150 range), and not because of a difference in data or calculation method. 16 additional alternative screen stocks have been on the official MFI list in the past 60 days. They are:

Alternative Stocks Appearing On Official Screen in Past 60 Days

AIRV	Airvana Inc.
BID	Sotheby's
BOLT	Bolt Technology Corp.
CALM	Cal-Maine Foods Inc.
CRS	Carpenter Technology Corp.
ENDP	Endo Pharmaceuticals Holdings Inc.
EPAX	Ambassadors Group Inc.
FRX	Forest Laboratories Inc.
FTO	Frontier Oil Corp.
GYI	Getty Images Inc.
HHS	Harte Hanks Inc.
LNCR	Lincare Holdings Inc.
LRCX	Lam Research Corp.
MPS	MPS Group Inc.
PRXI	Premier Exhibitions Inc.
XOM	Exxon Mobil Corp.

This, of course, leaves 43 stocks on the alternative screen that have not appeared on the official magicformulainvesting.com list. These are the "Magic Formula Stocks That Aren't".

Magic Formula Stocks That Aren't (In Alternative Screen, not in Official)

ABG	Asbury Automotive Group Inc.
ACTS	Actions Semiconductor Co. Ltd.
AHG	Apria Healthcare Group Inc.
AN	Autonation Inc.
ATAC	Aftermarket Technology Corp.
BKR	Baker (Michael) Corp.
CG	Carolina Group
CHNR	China Natural Resources Inc.
FCFS	First Cash Financial Services Inc.
FSRV	FirstService Corp.
GPX	GP Strategies Corp.
HTRN	HealthTronics Inc.
HWCC	Houston Wire & Cable Company
JLL	Jones Lang Lasalle Inc.
LII	Lennox International Inc.
MALL	PC Mall Inc.
MCO	Moody's Corp.
NPK	National Presto Industries Inc.
NTES	Netease.com Inc.
NVR	NVR Inc.
OMC	Omnicom Group Inc.
PAG	Penske Automotive Group Inc.
PCP	PRECISION CASTPARTS CORP
PM	Philip Morris International Inc.
PTNR	Partner Communications Company Ltd.
PWRD	Perfect World Co. Ltd.
RIMG	Rimage Corp.
RSCR	Res-Care Inc.
SAH	Sonic Automotive Inc.
SIGM	Sigma Designs Inc.
SMOD	SMART Modular Technologies (WWH) Inc.
SNDA	Shanda Interactive Entertainment Ltd.
SPTN	Spartan Stores Inc.
SUTR	Sutor Technology Group Ltd.
TRMS	Trimeris Inc.
TTC	Toro Company
USNA	USANA Health Sciences Inc.
VM	Virgin Mobile USA Inc.
VSEC	VSE Corp.
WCC	WESCO International Inc.
WMZ	Williams Pipeline Partners
XING	Qiao Xing Universal Telephone Inc.
ZINC	Horsehead Holding Corp.

So what gives? Why do these stocks not show up on the official screen, especially when there are some very attractive companies in the list? Without doing an extensive analysis, there seems to be a few immediately visible reasons. First, some of these companies have appeared on the official screen recently, just not in the past 60 days. A few examples here include VSE Corp. and Healthtronics. So, some of them are probably lurking just outside the cutoffs. Second, it looks like the official Magic Formula screen throws out stocks with negative equity (which likely equates to negative tangible capital invested). Examples on the alternative screen include Moody's and Virgin Mobile USA. Third, the alternative screen includes a few new issues, which don't have twelve months of official SEC filings yet, such as Philip Morris International. Finally, and most importantly, the two screens are using different data sources - Google (Reuters) for the alternative and Compustat for the official. The way databases treat such things as one-time gains or charges, asset sales, minority interest, and such can greatly affect the pre-tax earnings figure used.

MagicDiligence appreciates having this alternative screen. There are some attractive investments that do meet the great company at a cheap price test that you won't find on the official screen. In particular, Philip Morris International, Moody's, Toro, Shanda Interactive, and Autonation have been touted by the gurus. Folks who use the Magic Formula as a tool for finding great investment opportunities should use this alternative screen by all means to expand their universe of potentials. At MagicDiligence, I'll continue to use the official screen exclusively to choose Top Buys, but will comment on interesting alternative investments as they appear.

Steve owns no position in any stocks discussed in this article.

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