Examples Of Poor "Magic Formula" Stocks

Joel Greenblatt's The Little Book That Beats The Market was a landmark book in value investing. In a little over 150 pages, he concisely explained how two simple factors - Earnings Yield (EY) and Return on Tangible Capital (ROTC) - could be used to find attractive stocks to outperform the market. And outperform it did! Over the 17 years of back testing from 1988 to 2004, the Magic Formula produced annual investment returns of 30.8% versus the S&P 500's return of 12.8%.

However, a look at some of the stocks that appear on the Magic Formula Investing (MFI) screen reveals that some are rather obviously poor investments. The screen will uncover companies with fad products, where success is unlikely to be repeated. Some companies have such a low valuation due to financial or management problems. Still others are hanging on in a dying industry. Companies in cyclical, commodity-based industries will often be screened at the top of the price cycle and discarded at the bottom. This, of course, is the opposite of how to invest in cyclical stocks.

There are 4 primary criteria an investor can use to find the best Magic Formula opportunities. Stocks that fail one or more can be discarded. By doing this, an investor following the MFI strategy can put him or herself in the best position for potential success. This article will list each criteria, and provide an example of a current Magic Formula stock that can be discarded based on it.

1) Financially healthy with strong, reliable cash flows, reasonable debt, and durable competitive advantages.

An example of a stock not meeting this criteria is Idearc (IAR). This company was recently spun off from Verizon, and they publish the yellow pages books in areas where Verizon is the local carrier. They also run yellowpages.com. The problem with IAR is that Verizon saddled the company with a large debt load. Debt interest eats up 50% of operating earnings, leaving the company with a paltry 2.0 coverage ratio. This leaves very little wiggle room if something goes wrong in the business. What's more, advertising dollars are trending online, phone directories are more easily searched online, and cell phones are increasingly more capable of accessing online directories. This is a bad combination for Idearc's future prospects.

2) Are not the beneficiary of a one-time "fad" product.

Heely's (HLYS) is a classic fad product company. The company had a huge breakthrough last fall with their sneaker/rollerskate combination shoes. But the demographic - pre-teens - is a notoriously fickle group where fads go to rise and fall, often within the span of a year or two. Heely's has given no indication they can follow up with another great product to maintain earnings. The ROTC is based on last year's fad, and the EY is based on the bleak outlook going forward. It is unlikely the company will ever regain their prior success.

3) Have experienced and trustworthy management, by all available indications.

This one is more subjective, and probably accounts for the fewest discards. One example is King Pharmaceuticals (KG). The company has constantly had to take one time charges and restate earnings due to accounting issues. The question here is, can we trust the financial results on which the Magic Formula statistics are based? Until proven otherwise, play it safe and look elsewhere to invest.

This rule is particularly important for small cap stocks. Small companies are more dependent on good management to grow and survive. It's important to look for large insider ownership and good results for years before even considering a micro or small cap company.

4) Are not operating in a declining industry with poor future prospects.

Can you believe there are companies that still make pagers, over 10 years after cell phones became mainstream? There are, and one of them is a perennial top 25 Magic Formula stock - USA Mobility (USMO). Pagers still exist, but are quickly losing their price advantages and will soon go the way of the telegram, telegraph, and carrier pigeon. USMO is facing quickly declining revenues and without sales growth, no company can grow earnings for very long. USMO is an easy discard.

By using the above criteria and a little investigative work, a moderately experienced investor can greatly reduce his potential risk in following the Magic Formula stock strategy.

Steven Alexander is the founder and voice behind MagicDiligence ( http://www.magicdiligence.com ), a website dedicated to researching stocks appearing in Joel Greenblatt's Magic Formula Investing screen.

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Kukup And Kukup Island In Malaysia

Kukup and Kukup Island are situated at the Southern tip of the State of Johor of Peninsula Malaysia.

A visit to Kukup town and Pulau Kukup (Kukup Island) is definitely a complement to the visit to Tanjung Piai, the Southernmost tip of the Asian Mainland, because it is famous for seafood and leisure activities. Kukup town is just about 15km from Tanjung Piai.

Kukup consists of 3 villages - Kukup Laut, Air Masin and Kampung Melayu. The villages used to be made up of wooden houses built on bakau stilts.

Kukup is a fishing community that is famous for seafood and restaurants and cage-cultured fish farms.

Tourists especially Singaporeans come to Kukup for seafood and holiday. Visitors may visit the fish rearing area known as "kelong" (cage-cultured fish farm) in the sea between Kukup Jetty and Kukup Island. There are private houses erected by the seaside which are only accessible by boat from the ferry terminal. Tourists may book and stay in those private house and carry on whatever leisure activities like gambling, mahjong, angling, barbeque etc.

Visitors may buy dried fish (ikan bilis) and squid, "keropok" (crackers) and other marine based food produces and condiments like "belacan"(dried ground prawn), "cencaluk" (seasoned small prawn) and "agar-agar".

Kukup Island is situated just about 3 minutes boat ride away from Kukup Jetty. The boat ride will cost RM5-00 including return trip. Visitors will have to pay RM10-00 if you stop a fish farm along the way.

There is an immigration check point at the Kukup Jetty. Visitors can travel to Batam and Tanjung Balai (Karimun), Indonesia from the Kukup Jetty.

Kukup Island is one of the largest uninhabited mangrove island in the world.

For decades, people tried to settle on this island but not successful. It remains uninhabited until today.

Kukup Island has an area of approximately 648 ha and is surrounded by 800 ha of mudflats. In the old days, it was floaked by vanguished pirates and early prisoners. Its importance reduced abruptly due to decrease of fortunes. Now it is revived to be bustling tourist hub with Singaporean visitors coming for leisure and seafood.

Kukup Island was gazetted a national park in March 1997 and is now run by Pulau Kukup Johor National Park.

In January 2003, Kukup Island was granted the status of a "Wetland of International Importance" or RAMSAR Site by the Geneva-based Ramsar Convention Bureau.

Boardwalk is built deep into the mangrove of the island. Visitors may take a 45 minutes walk into the mangrove using the boardwalk. Explanation signboards are erected by the side of the boardwalk showing the species of flora and fauna on the spot. It serves the purpose of education for the children and adults.

At the end of the boardwalk is a 6 level watchtower. It brings visitors above the tree canopy and affords visitors a 360 degree view of the Kukup Island. It is a stunning horizon of green sea with gentle bliss blowing on the face.

Water birds including migratory species from Russia and China congregate at the Southern part of Kukup Island i.e. the mudflat area. It is definitely a spot that cannot be missed by an ardent birdwatcher.

Other fauna like mudskipper, fiddler fish, wild boar can be seen on the Kukup Island.

This article is written by Chai Yong from http://www.temasekmap.com which provides physical map of Singapore, map of Batam & Bintan, map of Johor & Johor Bahru and an ebook; and from http://www.window-safety-lock.com which is about a keyless Griloc window safety lock.

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