MagicDiligence
Magic Recipe -0.18%
Deep Value -0.16%
Star List 0.41%
S&P -0.05%
Today's Performance (see long-term performance)

How the MagicDiligence Screens Differ from the Magic Formula Screens

One question I get asked a lot from readers is: "how do the MagicDiligence screens differ from the official Magic Formula screens?"

It is an excellent question. On average, the overlap from similar market cap/number of stocks between the two screens is about 70%, so that means that a little over 1 in 3 stocks are different between the two lists. Why is that?

Opacity of Statistical Calculation Methods

How the actual earnings yield and return on capital figures are calculated - and heck, what the figures even are - is opaque on the "official" screener. It just spits out a list of stocks without ranking or any kind of statistical numbers. So matching the exact lists has proved next to impossible, and MANY have tried!

The only hints we have are from the appendices of The Little Book that Beats the Market. They seem straightforward enough:

Return on Capital = EBIT / (Net Working Capital + Net Fixed Assets)

Earnings Yield = EBIT / Enterprise Value

But at a closer look, a lot of questions arise. For one, the appendix states "excess cash not needed to conduct the business was excluded" - but what exactly is excess cash? Even something as seemingly simple as EBIT becomes questionable, as the appendix states it is EBITDA - Maintenance Capital Expenditures. But "Maintenance Capital Expenditures" is not a reported line item in financial statements!

The MagicDiligence screens clearly define not only the discrete earnings yield and return on capital figures, but also the calculations used to reach both. The full calculations can be seen by running your stock through the Single Stock Stats Calculator.

However, there are likely differences in the calculations. This is reason #1 why the screens differ.

Different Data Providers

The official site uses S&P's Capital IQ data service, while MagicDiligence uses FactSet data via Xignite. These services often try to fit unusual reported line items into standard categories, so it is not unusual to see financial data categorized differently between data providers. This can lead to different earnings yield and return on capital figures, EVEN IF the same calculations are used!

Some examples of this are how different data providers categorize one-time expenses, and errors in data transcription (this is a problem with any screening tool, unfortunately)

This is reason #2 why the screens differ.

Odd Treatment of Companies with Financing Divisions

I've noticed that the "official" screens treat companies with financing divisions oddly. Some examples of this include Pitney Bowes (PBI) and H&R Block (HRB), which to me don't look particularly cheap from an earnings yield perspective but are common entries in the official screens.

While I can't say exactly what the official site is doing, my assumption is that it is awarding net interest income to earnings while subtracting out financing debt from invested capital. Essentially, this treats the finance division's income as capital-free earnings! This is just a guess, though, the opacity of the official screen makes it difficult to say for sure.

While not a major contributor, this is the third reason I believe the screens differ.

Different Treatments for Foreign Stocks

The final reason for differences between the screens are treatment of foreign stocks.

As a rule, the "official" screens toss out most companies not domiciled in North America and trading on one of the major U.S. stock exchanges. There are some exceptions to this rule (Accenture (ACN) comes to mind), but in general, very few non-U.S. and Canada stocks are to be found.

MagicDiligence does things a little differently. Like MFI, we toss out any American Depository Receipt (ADR) stocks because these companies usually report in native currency. However, any stock with a native listing in the U.S. and reporting in U.S. dollars is considered by MagicDiligence. This explains many differences in the smaller cap screens, as we include stocks like Israeli-based VocalTec (CALL) and Russia-based CTC Media (CTCM).

Conclusion

Hopefully this helps clear up one of the more common questions asked by readers! There are likely some other minor differences, but this covers the major reasons. Remember, having more attractive stocks to choose from is a GOOD thing!

You can see our pre-created screens here, and members can create custom screens here.

Get unlimited access to the our EXCLUSIVE collection of useful, simple and effective stock screening tools! Our Spells offer 'Magic'-style ranking screens for Magic Formula, value, and growth investors. Our Spell Caster screener lets you create the 'Magic'-style screen of your dreams. Our Business Model Diligence reviews tell you our opinion of the quality of the businesses underlying your screened stocks. And much more, all for the lowest price in the investing world!
Become a MagicDiligence Member Today!

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.

© 2008-2017 Alexander Online Properties LLC