Top 30/50 Million:

In:

• Chart Industries, Inc. (GTLS)
• ClickSoftware Technologies, Ltd.  (CKSW)
• LoopNet, Inc. (LOOP)
• Pre-Paid Legal Services, Inc. (PPD)
• ViroPharma Incorporated (VPHM)

Out:

• Comfort Systems USA, Inc (FIX)
• Heartland Payment Systems, Inc. (HPY)
• PROS Holdings, Inc. (PRO)
• Qiao Xing Mobile Communication Co., Ltd. (QXM)
• VAALCO Energy, Inc. (EGY)

Top 30/2000 Million

In:

• IMS Health Inc (RX)
• Jacobs Engineering Group, Inc. (JEC)

Out:

• Polo Ralph Lauren Corp (RL)
• Precision Castparts Corp (PCP)

So far the results have been bad. Just about every blog/site testing the magic formula has underperformed the market. For example, check out this magic formula investing blog, the blog is filled with posts about the under performance of the magic formula. Although the blog is a great read, it’s unfortunate the fella is losing money.Now, Joel Greenblatt does mention in his book and in interviews that the Magic Formula will go through periods of time in which it will under perform the market, but at what point does the public draw the line and say it simply does not work.

In my opinion, the magic formula does work. The idea of buying companies with high pre-tax earnings and high return on capital is what value investing is all about. Take Burlington-Northern (BNI) as an example. Even after its run to $91, the stock still trades with a pretax earnings yield of 12.17%. I think Warren Buffett was buying BNI when it had a pretax earnings yield of 15%. A stock that Warren Buffett and others have been loading up on is Kraft (KFT). Kraft currently trades with a pretax earnings yield of 8%, which does not justify the whales loading up on it. But, considering Kraft has 3.57 billion of operating cash flow alone, Kraft’s management has a lot of flexibility on what it can due to enhance shareholder value.

Finally, it has been 2 1/2 years since the book was written and the results have not been pretty. Joel Greenblatt does advocate a holding period of 3-5 years so one can at least replicate the results in his book. The magic formula continues to be one of few strategies that offer a clear sell strategy (sell after 1 yr and 1 day) and a clear buying strategy and it is times like these that truly test investors.

What are your thoughts on the magic formula and its performance so far?

• 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.

Accenture Ltd. (34,ACN) is a leading management consulting, technology services, and outsourcing company. Recently, Accenture was named one of Morningstar’s Three Top Value Creating Stocks. With a pretax earnings yield of 15% and pretax return on capital greater than 100%, Accenture represents great value.

American Eagle Outfitters Inc. (17, AEO) a retailing company, engages in the design, marketing, and sale of clothing in the United States and Canada. American Eagle has projected growth rate of 15% for the next 3-5 years. Currently, the stock trades at a P/E of 10. American Eagle Outfitters currently has pretax earnings yield of 18% and pretax return on capital of 75-100%.

Jackson Hewitt Tax Service Inc (26, JTX)provides computerized preparation of federal, state, and local individual income tax returns in the United States.Jackson Hewitt is expected to grow earnings 20%+ for the next 3-5 years. Currently, Jackson has an earnings yield of 10% and pretax return on capital greater than 100%. The stock trades at a P/E of 16 and a forward P/E of 11.

McGraw-Hill Companies Inc. (41, MHP) provides information services and products to the education, financial services, and business information markets worldwide.McGraw-Hill currently has a pretax earnings yield of 12% and pretax return on capital greater than 100%. The stock has a P/E of 13.

Pacer International Inc (12, PACR) operates as a non-asset based logistics provider in North America.With the U.S economy slowing down (and possibly heading into a recession), Mr.Market is dropping freight stocks down. Pacer currently has a pretax earnings yield of 18% and pretax return on capital greater than 100%. Pacer currently has a P/E of 8 with a P/E of 7.

Disclaimer: I do not own any of the stocks mentioned above. Due your own due dilligance before investing any money.