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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).


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!

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