Yes, the membership site I created has shut down after one month in business. Did the business fail?  Far from it. I had a death in the family and I feel as a whole guerrilla has fallen on my back. Rather than offering a mediocre service and charge people for money, I have decided to shutdown the site. Below are some stats

• The site has 19 paying members and 3 free members
• Traffic averaged about 200 people a day coming through various sources
• VIP had 32 RSS subscribers
• The site ranked as high as 14 for the word” magic formula investing”. Which was not the word I was targeting
• The 19 paying members were acquired through FREE advertising. The advertising budget never reached $1
• Our Youtube Channel has 25 subscribers (http://www.youtube.com/user/valueinvestingpro)

Value Investing PRO Portfolio

I decided to build a Value Investing Portfolio from scratch as I felt it would be fun and would provide a true performance for the site. I purchased four stocks which I thought and still believe are bargains. Below are the four companies and their purchase price.

1. Vaalco Energy (EGY)@ $4.25
2. Pfizer (PFE)@ $14.65
3. Jacobs Engineering Group (JEC) @ $38.39
4. IMS Health Inc. (RX) @ $12.10

The one month performance doesn’t matter but basically it was flat.  I believe all stocks are trading at or around there original purchase price and still have a valid thesis to support the original purchase thesis

My Thoughts on Value Investing Pro

I was honestly giving it my all to make sure I was giving my subscribers all the information I have compiled over the years. The results through one month far exceeded my expectations. I expected to have 20 subscribers by the end of one year, I achieved that in a little over one month. But unfortunately, I just could not continue. I have so many thoughts on my mind that its wearing me down emotionally, physically and why not, financially. I honestly loved updating the site and couldn’t wait to write my weekly commentary. I had so many things on my mind that i built up throughout the week that once Saturday morning came around, I grabbed a cup of coffee and pounded away at the keyboard. I already have a couple of subscribers e-mailing me back asking whether I will re-open in the future, I don’t know. I honestly haven’t thought about it.

Warren Buffett On Goldman Sachs

Seems like the whole world has forgotten about Warren Buffett’s investment in Goldman.  Fox Business recently calculated a 40% return on its investment, or about a $2 billion profit, nice!!!

Warren Buffett Cartoon

I’m actually looking forward to this cartoon which teaches finances to kids.  Maybe it would serve useful to adults as well. I know I certainly could of used some help. As an example, I didn’t know how to write a check til my senior year in high school and that’s because I was part of the high school’s JRTC program.

Mohnish’s 650K Lunch With Warren Buffett

Apparently, Mohnish has been on a tear since going on lunch with Warren Buffett.  I thought this video was interesting.
Quick Story On Mohnish

I bought his book Mosaic for about $12. For some reason I didn’t like it and decided to resell it on Amazon for the same price.  It currently sells on Amazon for $100. Ouch…

Top 25/2000 Million:

In:

• Amdocs Limited (DOX)
• Fluor Corp (FLR)
• Jacobs Engineering Group, Inc. (JEC)
• McDermott International, Inc. (MDR)
• Rockwell Automation, Inc (ROK)
• Southern Copper Corp (PCU)

Out:

• Energen Corp (EGN)
• General Dynamics Corp (GD)
• Lam Research Corp (LRCX)
• The McGraw-Hill Companies, Inc.  (MHP)
• Robert Half International, Inc. (RHI)
• Western Digital Corp (WDC)

Top 25/50 Million

In:

• Bare Escentuals, Inc.  (BARE)

Out:

• BroadVision, Inc.  (BVSN)

Disclaimer: I own WDC

Having a back up is essential to someone who relies on the magic formula as its primary screen. instead of waiting for that day, why not be prepared and have our own screen.

Criteria

In “The Little Book That Beats The Market”, Joel Greenblatt gives the reader general screening instructions to find magic formula stocks. The criteria he outlines on page 136 is as follows:

• Use Return on Assets (ROA) as a screening criterioon. Set the minimum ROA at 25%. (This will take the place for return on capital from the magic formula study.)
• From the resulting group of high ROA stocks, screen for those stocks with the lowest Price/Earnings (P/E) ratios. (This will take the place of earnings yield from the magic formula study.)
• Eliminate all utilities and financial stocks (i.e. mutual funds, banks and insurance companies) from the list
• Eliminate all foreign companies from the list. In most cases, these will have the suffix “ADR” (for American Depository Receipt) after the name of the stock.
• If a stock has a very low P/E ratio, say 5 or less, that may indicate that the previous year or the data being used are unusual in some way. You may want to eliminate these stocks from your list. you may also want to eliminate any company that has announced earnings in the last week. (This should help minimize the incidence of incorrect or untimely data.

Our free screen (opens in Internet Explorer)

There are many free stock screens online that can help screen for magic formula stocks. The best one I have found is the MSN Deluxe Stock Screener . Its easy to use and its free. A quick note, make sure to download the deluxe stock screen which requires a download. Your screen should look like this once the Deluxe Stock Screen is opened.

Criteria

Return On Capital

Joel Greenblatt our stock screen does not give the option to search for stocks using  Return On Capital, but the MSN Deluxe Screen has an option for Return On Invested Capital. (Field Name >Investment Return> Return On Invested Capital).

=======> Return On Invested Capital > 25

Earnings Yield

Unfortunately, MSN Deluxe does not have EBIT criteria but the P/E will do fine. (Field Name>P/E Ratio: Current)

=========> P/E Ratio: Current = Display Only

That’s the basic magic formula screen. By default, MSN will return the top 25 matches but that can be changed so it will display the top 200 results.

More Fields I use

Below are some fields I use to help narrow the results and eliminate the financials.

Company Basics> Industry Name> Display Only ( Industry Name=Display Only)

(Field Name >Investment Return> Return On Invested Capital) Return On Invested Capital < 75

This helps  eliminates most trusts and software companies.

P/E Ratio: Current > 5

This coincides with Greenblatt’s suggestion of screen for companies with a P/E ratio greater than 5

Two More Criteria!

Market Capitalization > 2,000,000,000 (2 billion)

The market cap can be changed to one’s individual needs. For example, assume I want to search for companies that have a market cap less than 2 billion but greater than 50 million the input would be :

Market Capitalization < 2,000,000,000 (2 billion)

Market Capitalization > 50,000,000 (50 million)

To eliminate more software companies I will also set the screen so it will exclude companies on the Nasdaq.

(Company Basics > Exchange)

Exchange = NYSE

The results are in!!!!

Here are some interesting names.

Lorillard (LO)- Cigarretts

Accenture (ACN)- has been on the magic formula for a while

Nokia (NOK) – Although an ADR, its still itneresting

Coach (COH)-

Souther Peru Company (PCU)

CF Industry Holdings (CF)

Western Digital Corp (WDC)

Graco (GGG)

Mastercard (MA)

Aeropotale (ARO)

Marvel Enterntainment (MRVL)

Kinitec Concepts (KCI)

I excluded the NYSE criteria and Microsoft (MSFT)  and Research In Motion (RIMM) appear. Microsoft has been appearing on the magic formula website and I am sure it has been climbing the ranks.

Here is the URL to the screen:

http://moneycentral.msn.com/investor/invsub/finder/finderx.asp?Query=SV1QF168Z04L25ZF140Z00S1F227Z00F168Z05L75ZF140Z04L5ZF234Z04L2000000000Z&Name=Custom%20Magic%20Formula%20Screen&Tickers=25

Below is a list of stocks that I have a.) looked at or b.) currently looking at. As always, due your homework.

DOW Stock at or near 52 Week Lows

American International Group (AIG) – Stay away, I was wrong, management sucks. Firm has lost its culture

American Express (AXP)-  Trading at historically low valuations; Buffett might be buying

Boeing (BA)- Cannot produce a plane

Bank of America (BAC)- Again, Buffett might be buying here as he originally started buying at $35?

Citigroup (C)- Who knows how much junk is left in the trunk?

DuPont (DD)-  I don’t know much about….

General Electric (GE)- Old Faithful

General Motors (GM)- “I want my MPG…….oooops!”

Home Depot (HD)- Trading at historically low valuations

Intel (INTC)-  Outside Circle of Competence

JP Morgan (JPM)- Has one of the best CEO’s

Coca-Cola (KO)- BRAND

3M (MMM)- Great ROE%

Merck (MRK)- Don’t know much, I believe they still have viagra lawsuits….

Microsoft (MSFT)- Don’t Know Much

Pfizer (PFE)-  N/A

Proctor and Gamble (PG)- I love and own it at these levels

AT&T (T)- Surprisingly, not much buzz among the college crowd. More buzz surrounding Blackberry ( I have a blackberry myself )

United Technologies (UTX)- Im interested….

Verizon (VZ)- Love their products, hate their customer service

Im also very interested in Exxon (XOM)- The company is priced for $85 oil and estimates appear to be very low. (thanks Daveinhackensack!). Whether we like it or not, Exxon is a cash machine with a credit rating that is better than some countries.

Disclosure: I own PG,

Lets get straight to the point and rank the stocks as described in the book.Visit this page to rank the magic formula stocks, the site will rank the magic formula stocks and cut down the fat on which companies to invest in. I have to thank “streetcapitalist” from valueinvestingnews.com for providing this link. Now the due diligence begins. It is up to the investor to decide how deep in security analysis they want to get into. Now that we have the rankings, it is time to separate the good from the ugly.

The first thing I do is weed out the companies I understand. This is easy as either you get it or you do not. The action for this is as follows. Head over to Yahoo Finance, type in the stock symbol and click on profile. For Heely’s (HLYS), the profile looks like this.

In the case of Heely’s, it is understandable so it might be a candidate. The problem with the magic formula is it contains a lot of beaten down businesses. For example, biotechs whose products were not approved by the FDA or their main product is going to lose its patent. Another example might be the business whose earnings peak as the economy peaks. To weed out the good from the ugly head over to morningstar.com

Again, at this stage we are simply sorting the good from the ugly. Type in the ticker symbol, on the left side click “Key Ratios”. The screen should look something like this: (click on pic to enlarge)

As the picture illustrates, NVTL ’s (currently ranked 16th) numbers are all over the place. Everything from profitability and ROE% are inconsistent and does not merit any more time. What you want are consistent numbers like ARO ( a former magic formula stock).

Now time to get into some security analysis. I start with the S&P 500 reports provided by my broker and read as much as possible about the company through their SEC filings, and news (going back 2 years) . Everyone has their methods so I really cannot dwell onto this. Next, time for some valuation.

As far as I can tell, most magic formula stocks will carry a low P/E with them. Depending if I have time, one half of my buy decision will come from this. The other half will come whether or not the stock is trading at a 52 week or all time lows. This alone is dangerous but has worked well for me so far. Finally, if you are a fan of discounted cash flow models (I am not), Joel Greenblatt does hint on them in the book (pages 40-47).

The first thing we need is some analysts estimates on how much are earnings are expected to grow for the next 5, 10, 15, 20+ years. Not too many people can predict earnings that far and that is why I do not like DCF models. Again, head over to Yahoo Finance and click on “Analyst Estimates”. Scroll down until “Growth Estimates” appears. We are looking for “Next 5 years Per Annum”. (picture below)

Five years is a short enough period where the numbers are semi accurate. In the above picture, Heely’s is expected to grow 5% for the next 5 years. How accurate is that depends on your analysis of the company. As everyone knows, Heelys is a one product company and that itself might be a optimistic estimate. To be cautious, I highly recommend cutting back on growth estimates for any company. For example, if a company is expected to grow 15%, assume 10% growth. Now time for some valuation. I am going to assume you have a growth rate, discount rate and earnings per share for the past twelve months. Next, go to moneychimp.com’s discounted cash flow calculator and insert numbers. This will give you an estimated intrinsic value. Next, cross your fingers the stock is selling at a discount and buy or move on.

Aeropostale (ARO) is a recent example of a magic formula stock that I bought and sold. When I bought the stock, I found it on the magicformula website and on the 52 week low list. I knew the business as it is one of my favorite place to shop. All the numbers and story seemed fine and I bought it on a low P/E & 52 week low basis. If I had done the process detailed above, it would have been a good illustration. Analysts expect the company to grow 17% for the next 5 years. I could assume 12% for the next five years discounted at 10%. I would also assume either a 1% growth rate after 5 years or no growth at all. The 1% is a discount to U.S GDP growth (2-4%?) . No growth because the business has no moat and competition is plentiful (AEO, ANF, etc).Also, retilaers have a shady record. The 12% growth for the next five years and a 10% discount rate would give me an intrinsic value of $28.00. Aeropstale’s 52 week low is $18.xx, providing a 34% margin of safety. Again, that was assuming reduced growth rates and no growth after 5 years. Joel Greenblatt recently sold between $28 and $31.

Finally, this by no means is a tell all article on which magic formula stocks to invest in. This is simply what works for me. Feedback welcome. How do you select magic formula stocks?

Disclaimer: I own not stocks mentioned above; as stated I once owned ARO

• Websites
  • Value Investing News
  • Motley Fool Caps
  • 52 Week Lows
  • Stockpickr

• Print Media
  • Forbes
  • The Wall Street Journal
  • Barron’s
  • Fortune
  • Business Week
  • Sunday LA Times
• Forums
  • William Spetrino Jr.’s Value Investing Forum
  • Fool.com Boards (Boards are now Free!)

• Screens
  • Magic Formula Investing
  • Kiplinger’s Stock Finder (predefined screens)

Those are my sources for finding potential investments. I tend to use the Los Angeles Times Sunday edition and the Magic Formula Screens the most. Most (if not all) major newspapers have the P/E next to the stock symbol’s price. It is very easy to go down the list and highlight companies that are trading below the market’s P/E. I tend to highlight P/E’s lower than 18 and do individual analysis during the week. It is pretty expensive to subscribe to most of the print media available. A visit to the local library will do the trick. I have the luxury of having access to the school library that allows me to check out the day’s newspaper for free.

Stockpickr.com is the premiere website to find out what the Guru’s have been buying. They have improved their website layout and are constantly updating their picks. Stockpickr.com also tracks holdings of value investing hedge funds. Warning, following gurus blindly is very dangerous. It is highly recommended you do your own stock analysis before piggybacking.