Bye Bye Mr. Buffett
I bought Burlington Northern Santa Fe (BNI) when Warren Buffett was buying its stock hands over fist in the low 80’s and high 70’s. The stock soon railed its way to $110 as the price of crude climbed.The high price of crude made it cheaper for companies to send long distance shipments via rail. The ride was fun but unfortunately, I have to let Mr. Buffett’s stock picks go as I try to become 100% invested with magic formula stocks. Under my current stock picking system (contrarian investing + magic formula investing), BNI would have never been purchased as its ROIC (12%) is too low for my liking. I already know what is going to happen next, I swap stocks, while my current stock lags the market, BNI goes up to $175. Although this will hurt in the short term, I am conferable with my stock picks.
No Cash = Wait For Better Opportunities
When I decided to go with a 100% magic formula portfolio I made a commitment to find solid undervalued business with the idea to be 100% invested near the market bottom. So far the decision has been correct (knock on wood!). I based that decision on the idea that later on I would have to sell great stocks selling at average prices (BNI, PG) for great stocks selling at great prices (BA , and the stock to be named below).
Top 25
When I went on a buying spree, most of the stocks were ranked in either the top 50 or top 100 stocks with a minimum market cap of 2000 million. This was fine as I wanted to be 100% invested. Now that I am 100% invested, the only stocks I will consider purchasing are stocks ranked in the top 25 for companies with a minimum market cap of 50 or 2000 million (they usually overlap in between).
PG last man (woman?) standing
I purchased PG on June 30 as the stock price hit $60. I thought then it was TOO cheap and would provide some safety as consumers will not stop buying detergent. I plan to sell PG if another opportunity comes around or the stock hits $80 (my target price).
Buying Forest Laboratories (FRX)
According to Yahoo Finance, Forest Laboratories, Inc., together with its subsidiaries, develops, manufactures, and sells branded and generic forms of ethical drug products, and non-prescription pharmaceutical products. FRX currently appears on the magic formula screen for the top 25 companies with a minimum market cap of 2000 million. According to magicformulainvesting.com, FRX currently sports a 12% pre tax earnings yield and a ROIC greater than 100%. Calculating the numbers by hand, I get an earnings yield of 12.35 % and ROIC of 45%
Bruce Berkowitz Owns It
I had no idea. While checking out its P/E I found this
story link stating Bruce Berkowitz owns FRX. This by no means influenced my decision to purchase FRX but its great to know great minds think alike 
Disclaimer: I own PG and BA, have limit order for FRX and have sell order on BNI
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- August 23rd
You’re buying a stock, FRX, that will lose it’s number one drug, Lexapro, which accounts for 80% of the sales in 2012. You’re hoping that one of the drugs in the pieline will be as successful. That’s all there is to this. Of course return on assets and P/E will look good becuase they aren’t looking forward. To like this stock at this price you have to assume management can hit another homerun. While that may be possible, it’s not with the spirit of the magic formula stock screen. THis is not a stable, ongoing business per se.
This sounds like a good plan Alex. I am curious about the reference by Chris G to Lexapro. If this is true, will this alter your strategy?
Be well.
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