The Magic Formula's Cumulative Top 20

Over the past several weeks, MagicDiligence has been ranking stocks on two of the Magic Formula Investing screens by several well known value and momentum statistics that have been shown to outperform the market in James O'Shaughnessy's book What Works on Wall Street. For those that missed them:

• Highest Dividend Yield
• Best 1-year Relative Strength
• Lowest Price-to-Sales Ratio
• Lowest Price-to-Book Ratio

For the final article in this vein, we're going to combine all of the rankings into a cumulative chart, a quantitative measure of the most undervalued stocks on the MFI screen. The methodology here is simple. All of the stocks in the two MagicDiligence MFI screens, the top 100 over 50 million and the top 50 over 2 billion, were first ranked 1-130 (there were 20 stocks on both screens) in each category. For example, the stock with the lowest price-to-sales ratio gets 1 point, while the highest price-to-sales ratio received 130 points. Then this procedure was duplicated for dividend yield, relative strength (1-year performance), and price-to-book ratio. When a number of stocks held the same value, the ranking assigned was the same number to all matching stocks (for example, all non-dividend paying stocks earned a rank of 55). A cumulative score was achieved by adding the 4 rankings together. The goal is to find the stocks that ranked the highest on average across all statistics.

This list should just be used as a starting point for more research. O'Shaughnessy specifically points out that using too many statistical factors does not usually improve performance. However, the fact that these stocks would place high in several of his individual portfolio studies bodes well for their potential investment quality.

There are some interesting opportunities in this list, so here it is... The numbers in the columns represent ranking for each statistic used.

TickerCompanyP/BP/SDivYieldRelStrengthCumulative

PACR	Pacer International	20	4	10	31	65
IPHS	Innophos Holdings	63	19	15	7	104
MAN	Manpower	24	3	35	43	105
NOC	Northrop Grumman	7	28	19	55	109
FIX	Comfort Systems USA	44	15	39	13	111
EME	EMCOR Group	42	5	55	16	118
SHFK.PK	Schuff International	11	5	55	48	119
WTSLA	Wet Seal	47	19	55	9	130
HSII	Heidrick & Struggles	30	40	26	38	134
STX	Seagate	4	8	8	119	139
TBI	TrueBlue	32	10	55	49	146
GPX	GP Strategies	11	14	55	67	147
ABC	AmerisourceBergen	80	2	46	21	149
RSH	RadioShack	75	16	37	30	158
HCKT	Hackett Group	29	42	55	33	159
USMO	USA Mobility	69	70	4	17	160
WDC	Western Digital	22	16	55	72	165
OPTV	Open TV	16	93	55	3	167
IBAS	iBasis	2	1	55	109	167
KBR	KBR Inc.	30	10	45	84	169

A few observations here. Pacer International (PACR) dominates this list, scoring a full 39 points lower than second place Innophos (IPHS). That's well over half the 2-20 spread of 65 points. Both major U.S. disk drive makers also appear on this list. Disk drives have long been deemed a dying and hyper-competitive business by the market, but looking at the historical return on capital figures for both Seagate (STX) and Western Digital (WDC), as well as recent sales growth, the numbers sharply contradict this assessment.

MagicDiligence will be focusing upcoming quick take reviews on this list of stocks, some of which will be posted to the blog and the rest of which will be available exclusive to members.

Disclosure

: Author owns no position in any stocks discussed in this article.

Comments

[drone:]

There are a lot of companies on this list that don't appear on Greenblatt's list.

2008 Dec 16 10:48 AM

[Steve Alexa...:]

I used two screens - the top 100 over 50 million and the top 50 over 2 billion. All of these stocks were on one of those two screens this morning.

2008 Dec 16 09:42 PM

[granger:]

Thank you for the ideas. I will add them to my research. Interesting, very eclectic list.

2008 Dec 21 02:31 AM