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Introducing MagicDiligence's New and Improved Screening Tools!

I know there has not been much new (public) content on the site recently, but there is a good reason! Over the past few weeks I've been hard at work integrating a new data feed and other improvements which should result in a more accurate and useful set of MagicDiligence screening tools! Today we roll the improvements out to the site for everyone to use. All 4 of our applications: the Pre-Created Screens, the Single-Stock Statistics Calculator, the Portfolio Ranker, and of course the MagicDiligence Screener have been updated and contain the new features.

Over the next week or so I'll be posting articles going into deeper detail on some of the improvements and changes to the tools, but for this article, let's just quickly go through some of the highlights.

More Accurate Data

We've always used Xignite for the screener and statistics data, and still do. However, Xignite's back-end data provider has changed from Morningstar to FactSet, one of the biggest and best of the financial data suppliers. While Morningstar data was generally solid, there were several gaps and inconsistencies, an issue I expect to improve when using FactSet data.

Additionally, FactSet provides something our screens have been missing for a long time - accounting for long-term investments. Not having access to this information has skewed our Magic Formula statistics for stocks that carried a large amount of long-term investments, as they can be considered as cash equivalents for Magic Formula calculations.

To give a good example of this, consider Apple (AAPL). Apple carries a massive amount of long-term cash - over $160 billion! However, with Morningstar data, I could only access the amount of cash categorized as current, which in Apple's case is $33 billion.

The amount of net cash is used in calculating both enterprise value and invested capital, two hugely important components of the two MFI statistics of earnings yield and return on capital. Look at how not having long-term cash numbers affects the MFI stats calculations for AAPL:

Morningstar data (no long-term cash): earnings yield 8.0%, return on capital 34.0%

FactSet data (including long-term cash): earnings yield 10.2%, return on capital 231.4%

That's an *enormous* difference! It should make our screening tools far more accurate than before.

Improved Calculations

In addition to FactSet data, I have slightly revamped some of the statistics calculations to improve their accuracy. Specifically, how "excess cash" is treated when calculating enterprise value and invested capital.

Before, a negative level of excess cash caused an increase in enterprise value and invested capital. Now, if excess cash is negative, no adjustment is made to those two metrics. While this is a relatively minor change, I did notice it made a difference in improving the correlation of our own screener to that of the official Magic Formula screener.

Better Handling of "Negative" Invested Capital

Some particularly efficient businesses actually end up having *negative* invested capital, after subtracting out excess cash. This was apparent even in our previous tools, but the resulting negative earnings yield was not treated correctly. It was simply sorted to the bottom and ranked accordingly.

It is clear that the official MFI screens handle it differently. Several stocks over the years have showed up in the official screens that have negative invested capital (DHI Group (DHX) is a current example). In truth, negative invested capital is a very *good* thing, and negative ROIC due to it should be ranked highly, not lowly.

Since we throw out unprofitable companies anyway, our screeners now rank negative ROIC above positive ROIC, resulting in a more accurate list.

Screen Using Free Cash Flow Yield Instead of Earnings Yield

The most exciting thing about Xignite's move to FactSet was that FactSet provides trailing twelve month cash flow data. This allowed me to create something I had always wanted: a Magic Formula-style screener using free cash flow yield instead of earnings yield!

Free cash flow yield is simply (Free Cash Flow / Invested Capital). Free cash flow is a more "pure" metric than reported earnings, which can include all kinds of accounting assumptions. The Magic Formula uses earnings before interest and taxes ("EBIT"), which is often a hazy number - what exactly does it include? Free cash flow is not hazy. It is, precisely, the cash generated by a company over the past 12 months, minus maintenance capital expenditures.

Using free cash flow yield instead of earnings yield gives investors a very good picture of which stocks are truly cheap against the piles of cash they are generating, and we now have it.


I'm also excited about the future for our MagicDiligence tools. There are a lot of new data points FactSet provides that we can put to good use making our screener even more functional, while sticking to the fundamental tenants of Joel Greenblatt's brilliantly simple strategy.

Free For A Limited Time!

I've made all of the MagicDiligence tools free to anyone to try for the next few weeks. Please try them out and let me know what you think (email here). If you like what you see, consider joining our site as a member and get ongoing access to the tools, as well as a Top Buy pick from the Magic FormulaŽ screens every 2 weeks! Enjoy!

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