New series of analysis
I have been reading and researching something called magic formula investing. It was introduced to me via Joel Greenblatt in his book “The Little Book that Beats the Market“. Information about the formula can be found on his site or via Google, I don’t plan on rehashing any of it here.
I have decided to venture into MFI (magic formula investing) by putting some of my own hard earned cash towards it. Joel recommends purchasing 20-25 stocks from the MFI list in groups of 5-7 quarterly. This method aims to capture the average of the MFI stocks, and diversifying an investor. He recommends that if an investor is comfortable with indepth research that it’s possible to yield the same results with only 5-7 stocks in the portfolio. This is the strategy that I will be using, modified slightly, I will invest in 10 stocks, in two batches of five at a time.
In preparation for my first batch I have been researching the stocks that appear on the MFI top 25 list. My first screen was looking each up in Morningstar. Of the 25 stocks 10 are covered by Morningstar’s equity analysts. There are 3 four star, 2 three star, 1 two star, and 3 one star stocks, one stock is unrated.
My next screen is to run through the SEC filings reading almost everything submitted. I will be crunching some numbers to determine trends, and possibly extrapolate longer term trends. In looking at the filings I’m looking for earnings quality, and possibly warnings signs that would make me stay away from the stock. All of the stocks on the MFI list are there because of high return on capital, and low earnings yield, so determining if the stock is a value or below intrinsic value is a somewhat pointless exercise.
For my MFI series of blog posts I plan on including the following items about each stock I research:
- debt/equity
- pros/cons of the business
- potential timebombs (hopefully some insight as to why the stocks on the list)
- cash flow
- dividend policy
- long term growth potential
- any insight into management
Each post in this series will start with an [MFI #] in the title. Keep posted!