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MagicDiligence researches and recommends the most attractive value stock investing opportunities from Joel Greenblatt's Magic Formula Investing and similar screens. We use fundamental (and some technical) analysis to find equities of great companies with growth potential, outstanding management,... More
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  • Did Our Stock Picks Beat Magic Formula Investing In 2013? 0 comments
    Jan 7, 2014 7:26 AM | about stocks: HLFQ, UTHR, RFIL, IQNT, TPX

    How did the MagicDiligence Top Buy picks perform during 2013?

    It is a key question, as the premise of our service is to comb the Magic Formula® Investing (NASDAQ:MFI) and similar screens to accomplish 2 goals: warn against the bad apples in the screens, and highlight the stocks that are truly undervalued, with growth potential, good financial health, and solid management teams.

    The way we measure our success in achieving that goal is the same as everyone else's: did our picks beat the market (e.g. the S&P 500 ETF, SPY)? And of course, did our picks do better than the unfiltered Magic Formula screens we chose them from?

    Let's take a look.

    How a Newsletter Measures Performance

    First, a word about methodology. Ours is a newsletter-style service, with a new pick every 2 weeks. Therefore, the most logical way to measure performance is to take the price of the benchmark on the same day as the pick and measure relative gain/loss from that point until the pick is sold, or the end of the year is reached.

    Many picks rolled into 2013 from 2012, so when measuring performance for these on an annual basis, I use January 2, 2013 (the first day of trading), as the start date.

    As an example, we highlighted RF Industries (NASDAQ:RFIL) on 9/17 at a price of $6.85/share. The corresponding SPY price on that day was $170.31. After a rapid run-up, we sold RFIL on 10/21 at a price of $8.91 for a 31.1% gain. On 10/21, SPY closed at $174.40, which (with dividends) was a 2.9% gain from 9/17. Therefore, the RFIL position outperformed by (31.1 - 2.9) = 28.2%.

    Performance Summary vs. the S&P 500

    There were 46 Top Buy picks active at one point or another in 2013. The table below shows the average performance of those picks, the corresponding performance of SPY, the performance relative to SPY, and what percentage of the individual picks outperformed their SPY benchmark.

     

     

    Pick Avg
    Gain/Loss
    SPY Avg
    Gain/Loss
    vs. SPY% > SPY
    27.22%15.62%+11.61%68.09%

    Our picks outperformed the S&P 500 by an average of 11.6%, with about 68% of them beating the market.

    Performance Summary vs. Magic Formula Investing

    When comparing against the Magic Formula screens, I used the "top 50 over 50 million" screen, the most inclusive available on the official site. The performance of all 50 stocks over the date range (including dividends) is averaged to get the composite number we compare against.

     

     

    Pick Avg
    Gain/Loss
    MFI Avg
    Gain/Loss
    vs. MFI% > MFI
    27.22%23.21%+4.02%63.83%

    We see again MFI's 7-8% outperformance over the SPY fund, as shown in our 2013 Magic Formula review. Still, our picks beat the unfiltered screens by about 4% on average last year, and about 64% of them outperformed the screens.

    Biggest Winners

    41 of the 46 Top Buy picks held in 2013 delivered positive returns. Three of them generated 100% or better gains:

    Herbalife (NYSE:HLF) - up 125.23%

    GT Advanced Technologies (GTAT) - up 123.76%

    United Therapeutics (NASDAQ:UTHR) - up 111.68%

    We also had some nice short-term holds, that generated good returns over short holding periods:

    Inteliquent (NASDAQ:IQNT) - up 40.79% in under 2 months

    RF Industries (RFIL) - up 31.09% in 1 month

    Tempur Pedic (NYSE:TPX) - up 29.53% in 3 weeks

    Biggest Losers

    Pick enough stocks and you'll suffer some losers, and our Top Buy portfolio was no exception. Our biggest loser was Rio Alto Mining (NYSE:RIOM), a small gold miner who suffered with the plunge in gold prices last year. The second biggest was Weight Watchers (NYSE:WTW), a company that really missed on marketing early last year and suffered all year (and will suffer into 2014) because of it.

    Summary

    I was happy with the performance from our service last year, and as always I'm shooting for as good or better results for 2014. You can follow us by signing up for the FREE weekly newsletter below!

    Best in investing for 2014!

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