MagicDiligence Frequently Asked Questions
What is MagicDiligence?
Welcome! This page will get you started using the service, and is a good reference to come back to later for questions.
MagicDiligence offers unique, exclusive stock screening and ranking tools to help you generate interesting investment ideas any time and regardless of what type investor you are. Looking for undervalued stocks of great companies? We have a screen for that. Looking for rapidly growing companies with high returns on capital? We have a screen for that. Looking for interesting companies with rising, recurring revenues and a strong economic "moat"? Our Business Model Diligence ratings are designed for just that.
In keeping with our "magic" theme, we refer to our stock screens as "Spells"! The site offers 4 pre-created spells, using proven strategies to uncover attractive opportunities for growth or value investors. We also provide a full suite of tools so you can find EXACTLY the kind of stocks you are looking for!
See the below sections for more info on all of our tool offerings.
What stocks are considered?
Our Spells use a version of earnings yield and/or free cash flow yield in ranking stocks. As such, we aim to compare businesses that derive the bulk of their earnings from increasing profitability and free cash flow using common forms of working capital (mainly, equity and debt financing and self-funded working capital).
Some business models are designed around asset collection instead of earnings. Banks, insurance companies, master limited partnerships (MLPs), utilities, and a few other businesses often focus on (and are valued by) asset growth instead of earnings growth. We filter these out of our "universe" of stocks screened as valuing them by earnings is not particularly meaningful.
Additionally, we filter out international firms that list in the U.S. using American Depository Receipts, or ADRs. These companies generally report financial results in their native currencies (euros, yen, etc.), often less than quarterly, and frequently in different formats than U.S. GAAP rules. All of this makes comparing them against native U.S.-listed firms difficult and unreliable.
All other equities are fair game and our universe typically contains about 3,000 stocks!
What is Business Model Diligence?
While high earnings and free cash flow yields, and return on capital values are qualitative statistics easily measured from a company's financial statements, it takes real work to determine if a business model is a quality one for the long-term.
What is a quality business model? One with predictable, recurring revenues, in both thick and thin economic times. It has one of the 5 recognized long-term economic moat factors to protect against competitors stealing revenues and profits. And it still has plenty of "green field" to expand its business, with solidly rising revenue trends.
We conclude each Business Model Diligence review with a simple "stop light" rating:
- RED. We consider a RED company's business model to be unattractive. These companies usually do not possess any long-term economic moat, and have unpredictable and/or declining revenues.
- YELLOW. We consider a YELLOW company's business model to be modestly attractive. These companies clearly have some characteristics of long-term economic moats, and they often have reliably recurring and/or growing revenue streams.
- GREEN. The GREEN rating is our rarest, and indicates that we believe the business to have a very strong long-term economic moat, along with predictable recurring and/or growing revenue streams.
Business Model Diligence ratings can be seen in all of our Spell tables, in the output of any of our tools, and you can see the full "BMD" rationales on the individual stock pages.
What are Spells?
We playfully refer to our pre-defined ranked stock screens as "Spells"! You can find all of them through the Spells menu in the site header.
There are 4 pre-defined "Spells":
- The Magic Recipe Spell, denoted by the blue cauldron, is our best approximation of Joel Greenblatt's famous Magic Formula® Investing screens. This spell ranks all stocks over a $1 billion market cap by earnings yield and return on tangible capital rate. The goal is to uncover the best combinations of value and quality stocks available in the market today.
- The Deep Value Spell, the green cauldron, is a spell laser-focused on one thing: dirt-cheap valuations. We rank all stocks over $1 billion by earnings yield and free cash flow yield - and that's it! The result is a list of stocks that have generated a ton of earnings and free cash flow, but are selling extremely cheaply against those profits. Study after study has shown that earnings yield and/or free cash flow yield are EXTREMELY good at finding stocks that outperform the market over the next 12-18 months.
- The Quality Growth Spell, the orange cauldron, is the Magic Formula ranking strategy applied to find growth stocks. Here we take all stocks over a $500 million market cap, limit the set to companies with 3-year revenue growth and cash returns on capital in the top 20% of the market, and then rank them by those same 2 statistics, throwing out suspiciously high numbers. There is no more powerful recipe for long-term compound investment growth than companies growing their revenues at high returns on capital. This screen is where you go to look for the next Netflix or Amazon.
- The Star List Spell, the purple cauldron, is a unique screen that looks for stocks that have the best of all worlds. These are the ONLY stocks that rank in the top 20% of the market for all of these statistics: earnings yield, free cash flow yield, return on tangible and total invested capital, *cash* return on tangible and total invested capital, and 3-year revenue growth rate. They also must have a current ratio over 1.0 to guard against poor financial health. Only a very select few make the Star List, and usually they either have some unusual circumstance... or represent investment candidates with explosive upside potential!
What is the Spell Caster?
The Spell Caster is our most advanced and fully featured stock screening tool.
With the Spell Caster, you can do all of the following:
- Create a new screen from scratch, or modify any of our pre-defined Spells.
- Limit your "universe" of stocks by min/max market cap, industry, a variety of growth, value, and efficiency statistics, and more!
- Select any two metrics for ranking your universe of stocks - not just earnings yield and return on capital.
- Find only stocks that rank highly in our Business Model Diligence ratings.
- Show up to 500 stocks in your results!
The possibilities are endless. The Spell Caster can be used to generate almost any kind of earnings/cash flow/efficiency-based screen you can imagine. Try it out to create your spell!
How do I use MagicDiligence with a specific stock in mind?
Our site can also be extremely useful if you have a specific stock in mind!
Simply enter your ticker into the search bar in the upper right of the page, and select it in the result. This will take you to the individual stock page for that company. (You can also click any link for it in the site to go to this page).
Here, we show you how your stock ranks against the overall market for all of our "Magic" statistics. Instant Diligence tells you how good (or bad) the stock's valuation, returns on capital, and growth is compared to the overall market. It also tells you whether we consider your company a strong business model, or if it is a current member of any of our Spells! Calculations shows you exactly how we calculated our statistics, allowing you to double check our figures for posterity.
What is the Magic Screener?
In addition to being able to specify minimum market cap and number of stocks (as with the "official" screens), the Magic Screener provides numerous additional features:
- The actual ranking of stocks instead of just an alphabetical sorting
- Actual statistical values for each stock
- 3-Year Average Revenue Growth column to quickly find growing companies
- Business Model Diligence rating - our measure of the attractiveness of a company's business model
- Sortable columns
- Ability to rank by free cash flow yield instead of earnings yield.
- Ability to specify a maximum market cap in addition to a minimum.
- Ability to see up to 500 stocks, instead of just 50 as with the "official" screener.
What is the Portfolio Ranker?
The Portfolio Ranker allows you to compare any number of stocks against each other using the "Magic" method of ranking by earnings yield (or free cash flow yield) and return on invested capital. For example, you could compare a handful of technology stocks that interest you, your entire watch list of stocks, or even the S&P 500 to find the best options for potential investment!
What is the Stocks By Statistical Distribution?
The Stocks By Statistical Distribution tool allows you to see all stocks falling into a particular grouping for any of our primary "Magic" statistics: earnings yield, free cash flow yield, return on tangible capital, or 3 year average revenue growth rate. We group each of these statistics into 5 "buckets":
- "Poor" (0-20%): Stocks in this grouping are in the bottom 20% of our "universe" of stocks for this statistic. For example, a stock falling into this bucket for earnings yield would be considered one of the most expensively valued stocks in the market.
- "Below Avg" (20-40%): Stocks here are between the 20th and 40th percentile of all stocks for the selected statistic.
- "Average" (40-60%): Stocks failling into this bucket are "middle-of-the-pack" for the statistic selected.
- "Above Avg" (60-80%): These stocks rank better than average for the statistic selected, somewhere in the 60th to 80th percentile.
- "Very High" (80-99%): These stocks are at the top of the market for the given statistic. For example, a "very high" earnings yield is one of the highest 20% in the market, while a "very high" 3-year average revenue growth number indicates this is one of the fastest growing companies in the market.
- "Suspicious" (99-100%): For stocks at the very top 1%, we mark them as "suspiciously high". Stocks falling into this category should be examined closely for statistical anomolies or the existence of unsustainable one-time earnings events that skew their calculations from what could be normally expected. Usually stocks in this bucket have something odd going on... but not always! Occassionally a good opportunity can be found here.
What is the Billing Policy? How do I Contact You With Membership Questions?
Billing is performed on a monthly basis. The cycle begins on the date of sign-up and is renewed automatically in every subsequent month if not cancelled.
For membership questions or issues, or to cancel your subscription, please email email@example.com.
Joel Greenblatt and MagicFormulaInvesting.com are not associated in any way with this website. Neither Mr. Greenblatt or MagicFormulaInvesting.com endorse this website's investment opinions, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr. Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website. The information on this website is for informational purposes only and solely represents the views and opinions of the author. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind, nor can it be relied upon as the basis for stock trades. DON'T RELY SOLELY ON THIS WEBSITE'S INFORMATION OR STATISTICS! Please do your own research before buying. Alexander Online Properties LLC, the proprietor of this website, is not responsible in any way for losses or damages resulting from the use of this information. Alexander Online Properties LLC is not a registered investment advisor. All logos are trademarked properties of their respective companies.
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