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Deep Value -0.16%
Star List 0.41%
S&P -0.05%
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Magic Formula Stocks That Aren't

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,, 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

AEOAmerican Eagle Outfitters Inc.
ARPAmerican Reprographics Company
AYIAcuity Brands
CHEChemed Corp.
CHKECherokee Inc.
CMTLComtech Telecommunications Corp.
CPSIComputer Programs and Systems Inc.
CRDNCeradyne Inc.
CROXCrocs Inc.
CSGSCSG Systems International Inc.
DLXDeluxe Corp.
DTPIDiamond Management & Technology Consultants Inc.
ELNKEarthLink Inc.
HANSHansen Natural Corp.
HLYSHeelys Inc.
HURCHurco Companies Inc.
IARIdearc Inc.
ICFIICF International Inc.
JAKKJAKKS Pacific Inc.
KCIKinetic Concepts Inc.
KFRCKforce Inc.
MHPMcGraw-Hill Companies Inc.
MLHRHerman Miller Inc.
NTRINutriSystem Inc.
NVTLNovatel Wireless Inc.
OMPIObagi Medical Products Inc.
PACRPacer International Inc.
PCUSouthern Copper Corp.
PDXPediatrix Medical Group Inc.
PPDPre-Paid Legal Services Inc.
RHIRobert Half International Inc.
RSHRadioShack Corp.
SNCRSynchronoss Technologies Inc.
THOThor Industries Inc.
TPXTempur-Pedic International Inc.
TRATerra Industries Inc.
TRIDTrident Microsystems Inc.
VPHMViroPharma Inc.
WONWestwood 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

AIRVAirvana Inc.
BOLTBolt Technology Corp.
CALMCal-Maine Foods Inc.
CRSCarpenter Technology Corp.
ENDPEndo Pharmaceuticals Holdings Inc.
EPAXAmbassadors Group Inc.
FRXForest Laboratories Inc.
FTOFrontier Oil Corp.
GYIGetty Images Inc.
HHSHarte Hanks Inc.
LNCRLincare Holdings Inc.
LRCXLam Research Corp.
MPSMPS Group Inc.
PRXIPremier Exhibitions Inc.
XOMExxon Mobil Corp.

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

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

ABGAsbury Automotive Group Inc.
ACTSActions Semiconductor Co. Ltd.
AHGApria Healthcare Group Inc.
ANAutonation Inc.
ATACAftermarket Technology Corp.
BKRBaker (Michael) Corp.
CGCarolina Group
CHNRChina Natural Resources Inc.
FCFSFirst Cash Financial Services Inc.
FSRVFirstService Corp.
GPXGP Strategies Corp.
HTRNHealthTronics Inc.
HWCCHouston Wire & Cable Company
JLLJones Lang Lasalle Inc.
LIILennox International Inc.
MALLPC Mall Inc.
MCOMoody's Corp.
NPKNational Presto Industries Inc. Inc.
OMCOmnicom Group Inc.
PAGPenske Automotive Group Inc.
PMPhilip Morris International Inc.
PTNRPartner Communications Company Ltd.
PWRDPerfect World Co. Ltd.
RIMGRimage Corp.
RSCRRes-Care Inc.
SAHSonic Automotive Inc.
SIGMSigma Designs Inc.
SMODSMART Modular Technologies (WWH) Inc.
SNDAShanda Interactive Entertainment Ltd.
SPTNSpartan Stores Inc.
SUTRSutor Technology Group Ltd.
TRMSTrimeris Inc.
TTCToro Company
USNAUSANA Health Sciences Inc.
VMVirgin Mobile USA Inc.
WCCWESCO International Inc.
WMZWilliams Pipeline Partners
XINGQiao Xing Universal Telephone Inc.
ZINCHorsehead 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.

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