Steve Alexander's Comments

Forbes' 200 Best Small Companies Through the Magic Formula Screen

Wed, 02 Dec 2009 11:21:08 -0500

Sure. The earnings yield is meant to be compared against other investment vehicles like bonds. Anything over 10% is cheap, and anything over 17% or so is very cheap.

For MFI return on capital, anything over 100% I would consider very high, 60-100% quite high.

For large-cap, blue chip stocks like KO or PG, you usually see an earnings yield around 6-7% and ROIC in the 30-40% range.

On Dec 02 10:59 AM TATyszka wrote:

> Not everyone is hip to this Magic Formula. You think you could give
> us a little perspective? What's a good score? As low as possible?
> As high as possible? A particular range?

China Sky's Financial Statements: Huge Discrepancies

Tue, 24 Nov 2009 22:54:30 -0500

Asensio, save yourself from this one. You are not using logic. Look at it from your point of view. Let's assume the SAIC filings are gospel and TDR is losing $100k a year.

How on earth is CSKI internally funding a $13 million headquarters expansion? They are moving in this month, and it is verifiable.

Why would the company even consider (or be in financial position to) export products to Canada? Yet, that's what they are doing, and it is verifiable.

Even you mention the low revenues of the suppliers (presumably Heilongjiang Kangda Medicine Co. and Harbin Zhongjia Chem) in their SAIC filings - is it conceivable that a lot of Chinese companies under-report revenue?

Finally, if the company does what it says and the 2009 SAIC filing matches up with the SEC filings, you are in big, big trouble with your short position.

This is a dangerous short, and your case against it is not that strong.

'Up Listed Chinese Companies: Above Average Returns

Sun, 22 Nov 2009 00:13:26 -0500

The phenomenon you described has produced a lot of Magic Formula stocks, like CEU (mentioned), UTA, CSKI, and others. Good article.

Sturm & Ruger's Brief Burst of Value

Thu, 12 Nov 2009 16:30:43 -0500

ttm: 265.596mm, 44.144mm op profit, 16.6% op margin
2008: 181.483mm, 13.537mm op profit, 7.5% op margin
2007: 156.485mm, 10.258mm op profit, 6.6% op margin
2006: 167.620mm, 0.922mm op profit, 0.6% op margin
2005: 154.722mm, 1.837mm op profit, 1.2% op margin
2004: 145.624mm, 7.024mm op profit, 4.8%

This is all directly from SEC filings. I agree that new management is doing a good job with manufacturing, but I would argue vociferously that ttm margin improvement is more due to 100% utilization than any sustained lean manufacturing. I've accounted for improvements in my higher op margin assumption, as well as in a sustained revenue figure, largely due to high ASPs for the SR-556, despite what is sure to be lower volume due to pushed up sales.

There are no factual errors in the analysis, and margin assumptions are of course open to speculation. The gun business is not a secular growth market (in fact probably the opposite), so I believe it is difficult to justify $200mm in revenue. It is competitive as well, making it difficult to justify margin assumptions that are significantly and sustainably higher than historical averages.

5 Things to Consider Before Buying and Holding

Sun, 18 Oct 2009 17:19:58 -0400

How many straight traders are on the Forbes 400?

On Oct 18 02:50 PM VennData wrote:

> The idea that "For one, it is much easier to see and predict long-term
> business trends and advantages then it is to predict what is going
> to happen over the next few months or weeks." is comical.
>
> Prove it.
>
> This is just more Wall Street marketing (aka give me your money to
> invest for you.)

KHD: A Promising Value Stock

Fri, 16 Oct 2009 12:54:23 -0400

Great job, thanks.

eBay: Growth at the Right Bid

Thu, 15 Oct 2009 17:07:57 -0400

eBay will continue to grow, but most investors missed the boat on this one when it was sitting at just over $14 at this time last year. That was a ridiculous valuation for such high margins, cash flow, growth potential, and balance sheet. Now its about fairly valued, maybe slightly overvalued. No word on valuation in the article, although the business analysis is solid, IMO.

Steve

Jacobs Engineering: A Constructive Long-Term View

Thu, 15 Oct 2009 17:00:11 -0400

Jacobs is the best of the E&C picks out there, with a relationship business model and nice diversification across energy, government, and industrial. It has been on the Magic Formula screen for almost a year now. Nice write up.

Steve

Questcor Pharmaceuticals: Risky, But Cheap

Tue, 29 Sep 2009 11:04:59 -0400

Indeed, Vigabatrin (marketed as Sabril in the U.S. by Lundbeck) was approved by the FDA at the end of August and became commercially available September 21. It is the first officially approved FDA treatment for IS.

Thanks for the comments.

Polo Ralph Lauren: Doing Fine, But There's Cause for Concern

Mon, 27 Apr 2009 16:32:12 -0400

Yes, thanks for the corrections guys. I need an editor!

3 Intriguing Points About Qiao Xing Mobile

Mon, 27 Apr 2009 16:30:23 -0400

> Contradiction: "I've given Qiao Xing a C+ for growth potential. The
> Chinese mobile phone market is one of the most attractive in the
> world for several reasons."

It would be a contradiction if Qiao Xing was a market leader with little competition. It is neither. It may or may not benefit from market growth due to price and feature competition. It's unclear, and hence a C+.

Nokia's a Juggernaut, But What's Left to Conquer?

Fri, 17 Apr 2009 10:01:47 -0400

> Can you explain what you mean by "Symbian is not inherently a smartphone
> OS like Apple's or RIM's" and why those of Apple and RIM are ?
I
> am not aware of any technical reasons why one of them is not for
> true smartphones.

Apple and RIM both designed their operating system to handle smartphone activities like email, internet, and so forth, and have structured them to be expandable through third party applications that utilize QWERTY keypads and other hardware features.

Symbian was historically developed for phone hardware - number keypads that could perform some tasks like text messaging. Trying to shape and mold this into a good smartphone OS will be a challenge. You need to have a lot of low level features like memory management, task switching, data protection, power management, and so forth. Symbian was not developed with these in mind and adapting an operating system can take as long as creating a new one.

Why Return on Capital Is So Important to Investors

Fri, 17 Apr 2009 09:45:29 -0400

> 1) In your invested capital formula, what's the intuition behind
> using those particular accounts? It seems more intuitive to me to
> define "invested capital" as net debt + equity. More explanation
> on your invested capital formula would be great.

The idea is to count "invested capital" as the net assets that are employed in generating profits. Lots of good companies have huge cash wads that are not employed in core profit generating activities. If you include these extra assets, your return on capital figure will be unduly low.

> 2) Also in your invested capital formula, you have (Short-term Liabilities
> + Interest Bearing ST Liabilities). But Interest Bearing ST Liabilities
> are already in Short-term Liabilities, so aren't you double counting
> here?

No, it removes Interest Bearing ST Liabilities from the equation. I would be double counting if it was (Short-term Liabilities - Interest Bearing ST Liabilities).

Why Return on Capital Is So Important to Investors

Thu, 16 Apr 2009 08:59:00 -0400

On Apr 16 04:47 AM ArtfulDodger wrote:

> Steve Alexander:
>
> This is a good article with good points. Thanks.
>
> These calculations certainly help to quantify a stock. Do they provide
> you with enough info to buy?
>
> Would you buy without qualifying the company? I.e., how well management
> works, how well the company markets, the quality of its products,
> competition, etc.
>

ROC is one point to look for when qualifying an investment, not the only point. Like Buffett says, a great business does not always make a great investment if it's priced too high. I always do a management and competitive analysis before recommending a stock. The Magic Formula strategy itself helps with price, as it only filters out stocks with a high operating earnings to enterprise value ratio (earnings yield).

Thanks for the comments everyone!

The Right Way to Look at Cash Flow

Wed, 01 Apr 2009 12:16:47 -0400

Not really. The '01 cash flow numbers would have been generated by the stores existing at the time, as would the depreciation figure. Same with '08. There is no future assumptions in the calculations.

It's interesting that it cost Home Depot 3x the depreciation in '08 for roughly 2x the stores. Logically it makes sense though, as older stores would require more upkeep than newer ones.

LCA-Vision: Have Revenues Bottomed?

Thu, 19 Feb 2009 16:16:15 -0500

Saj - How do you see the board room battle playing out here? I'm concerned that all this good news is just posturing to win the proxy battle against the Joffes. Do you really believe current management?

I do agree with you that LCA has a great chance to be a stellar investment when the market turns, seeing as TLC is in a much more precarious position.

Steve
MagicDiligence.com

Using the 'Magic Formula' to Find Foreign Stocks

Tue, 10 Feb 2009 23:16:25 -0500

A few actually appear on the official screen, if they convert results to USD for the SEC. CTC Media comes to mind. There are a few Chinese stocks as well (CSKI, others).

Steve
MagicDiligence.com

Does Pfizer / Wyeth Merger Create an Arbitrage Opportunity?

Tue, 27 Jan 2009 10:41:50 -0500

Good review, thanks. The key thing here is the credit rating. Pfizer's balance sheet is going to be depleted after this - the combined company will owe over $50 billion in debt while carrying just Wyeth's cash balance of about $14 billion. While the 50% dividend cut will help, and the combined company should generate free cash flow of around $15 billion a year initially, the sustainability of those cash flows is in question given the 2011 patent cliff for Lipitor.

Also, since this is not an all cash deal, the arbitrage target is constantly moving with Pfizer's stock. Given that this deal has a lot of short term negatives (20% equity dilution, big debt load, dividend cut), it looks a bit risky to me.

Steve
MagicDiligence.com

Quick Take: The Mosaic Company

Sun, 18 Jan 2009 12:02:59 -0500

Barnettech - MFI = "Magic Formula Investing". The screen can be run for free at:

magicformulainvesting....

What Apple Is Doing Wrong and Why It Means Trouble

Thu, 15 Jan 2009 12:15:25 -0500

Apple has a lot of things it didn't have the last time the company almost dissolved. For one, iTunes is a massive lock-in mechanism, and even though it's moving to all MP3, it's still only accessible from Apple hardware. Secondly, the iPhone is a closed platform that has the potential to dominate much like Windows on PCs. Once a substantial investment is made in games, apps, music, movies, contacts, etc., a user is less likely to abandon the platform unless something else is significantly better. These lock-in benefits also drive demand for Mac computers, as they most easily integrate with iPods and iPhones.

Apple's computers fill the "BMW" niche - they are generally cache, but even an objective viewer would generally consider the build quality and experience superior to the Dell's and Acer's of the world. While this is not really a sustainable competitive advantage, it is a current one.

Jobs leaving, if it turns out to be permanent, it certainly a long term concern, but he's built a company that can sustain itself for many years without him. The bench here is strong too - Cook is a solid ops guy, Ive and Forestall are top notch hardware and software guys, respectively, and Schiller has overseen a very successful marketing operation. I wouldn't worry about Apple, especially at these prices.

The Good and Bad of Fertilizer Stocks

Thu, 15 Jan 2009 09:51:25 -0500

Great job, I learned a lot from this article.

Why Joel Greenblatt's 'Magic Formula' Outperforms, and How to Do Even Better

Thu, 08 Jan 2009 15:55:19 -0500

The Magic Formula did not underperform the market in 2008, and I have the data to prove it:

www.magicdiligence.com...

The strategy has worked and will continue to work. O'Shaughnessy's studies collaborate Greenblatt's findings. Low multiple stocks outperform over long periods of time. End of story.

Quick Take: Herman Miller Inc.

Thu, 08 Jan 2009 13:03:59 -0500

> What do you make of Greenblatt's system? I read his book last year
> but decided to tweak it a bit by using his simple approach to just
> get me the first screen, then apply some DCF to the companies that
> I thought had competitive advantages, high barriers, for undervalued
> plays.
>
> Are you doing something similar along those lines? I couldn't jump
> straight in blindly and use his system. The back testing research
> he did shows good results, but I'm not sure if he ran his back test
> across every possible permutation of stock sets over the same period.

What you describe is basically what I'm doing at MagicDiligence. Several MFI stocks are also faddish, some have poor financial health, others are cheap because they are in declining industries. I steer readers away from those and into the truly great ones that can sustain competitive advantage over a long period of time.

Quick Take: Herman Miller Inc.

Mon, 05 Jan 2009 09:30:32 -0500

Thanks for the great comments. I agree that building an office furniture company to Herman Miller's scale is difficult. But scale does not provide them with any significant competitive advantage (especially as MLHR is a premium seller). A local or regional house can compete effectively, especially on price.

I completely agree that the company is well run. My main concerns are long term competitive pressures and of course near term macro-economic risks.

Thanks again.

Steve Alexander

Book Review: Warren Buffett and the Interpretation of Financial Statements, by Mary Buffett and David Clark

Tue, 23 Dec 2008 11:16:45 -0500

Greenwald is an excellent author on competitive advantage. One of my articles on here reviews his book Competition Demystified, which I thought was a fantastic study on competitive dynamics. Pat Dorsey (of Morningstar) also talks eloquently on the factors behind sustainable economic moats. The book reviewed here is very much a "lite" version of their material.

Big Media: Future Growth Depends on Serious Change

Mon, 10 Nov 2008 16:29:37 -0500

> There will be a concurrent meltdown with the large ad/PR/etc agencies.
> Just wait. There will be "Lehmans" in the communications business.

Lehman, Bear, AIG, etc. were all levered 25-30 times and held the bulk of their assets in illiquid securities of unknowable value. How does this even remotely compare to the media corporations like News Corp that still is forecasting 4.4 billion dollars in profit even in a down market?

It's fun to make bold proclamations, especially when there is no responsibility attached, but please try to provide value to SeekingAlpha readers.

Steve
MagicDiligence.com

What's an Investor to Do - Patience or Panic?

Thu, 09 Oct 2008 10:17:18 -0400

To those who think their money should go up every day, you don't belong in the stock market. No long term successful investor has played financial hokey pokey, they are almost to a person patient, with a several year horizon on investments. You may feel good today sitting on cash, but you will feel poor when the market turns. It always has. Always.

News Pitch: Why To Buy News Corp

Fri, 29 Aug 2008 08:47:10 -0400

The link above is the quantitative part. Pitch articles are qualitative. Magic Formula stocks are by definition cheap with high return on capital.

News Pitch: Why To Buy News Corp

Fri, 29 Aug 2008 08:46:23 -0400

www.magicdiligence.com...

Thor Industries: Strength From Weakness

Thu, 28 Aug 2008 09:56:16 -0400

Great analysis, spot on. They are so much better run than the competition, and travel trailers will survive high gas prices better than motor homes. If oil dips back, as it always has, current prices represent a nice buy.

Steve
MagicDiligence.com