MagicDiligence Frequently Asked Questions
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 wand, ranks all stocks over a $1 billion market cap by earnings yield and return on invested capital. The goal is to uncover the best combinations of value and quality stocks available in the market today.|
|The Deep Value Spell, the purple wand, 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 quite good at finding stocks that outperform the market over the next 12-18 months.|
|The Quality Growth Spell, the orange wand, is the 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.|
|Finally, the Green Team Spell, naturally the green wand, collects all of the stocks that have received a "green" business model rating, then sorts them based on their 3-year compound revenue growth rate, limiting to the top 50 if necessary. We feel all Green Team stocks have superior business models and have the potential for market crushing returns over the long term, while limiting risk.|
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. Quantitative 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 your company is a current member of any of our Spells! Calculations shows you exactly how we calculated our statistics, alowing you to double check our figures for posterity.
And, of course, for many stocks we have Qualitative Diligence, where we provide some analysis and opinion based on the company's revenue growth potential, level of recurring revenues, and long-term competitive advantages to determine a Business Model Rating for it.
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 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.
|Exelixis, Inc. (EXEL)|
|Appian Corporation Class A (APPN)|
|AppFolio Inc Class A (APPF)|
|Hershey Company (HSY)|
|Harley-Davidson, Inc. (HOG)|