Taking The (MFI)ce Tea Plunge!

Once again, I am no doubt showing my age… for those who don’t remember the Nestea Plunge (or perhaps weren’t born, sigh) I sincerely apologize.

Late yesterday I decided to sell my emerging market mutual funds (which had done quite nicely thank-you). Time will tell if that wasn’t so smart, and yes… I will likely look back and grade myself. That freed up some moolah to buy four of the stocks that I have recently been reviewing. I figured with the recent swoon that this was as good a time as any to take the (MFI)ce Tea Plunge.

I think the other factoid that persuaded me was that I re-read part of TLBTBTSM (I think I got that right) and decided you are either in or out. None of this pussy-footing around. So now my entire (not so vast) fortune is riding on JG’s book. (not entirely true as my wife-ola would kill me, but makes a nice poetic point).

I am now the proud owner of 24 MFI stocks. The recent Fab Four choices were FDG, KG, OVTI & RAIL. The table below (I am trying to improve the format) shows where I stand at the end of May.

Stock	Cost	Current	Gain
NCOG	$19.39	$27.05	39.5%
UST	$39.36	$44.01	13.3%
PCU	$78.13	$85.15	12.5%
NSS	$45.89	$49.92	8.8%
PTEN	$27.74	$29.90	7.9%
MTEX	$13.11	$13.99	6.7%
MGLN	$38.34	$40.45	5.5%
OVTI	$28.50	$29.30	2.8%
PNCL	$6.68	$6.84	2.4%
CHKE	$37.55	$37.79	2.2%
KG	$17.60	$17.78	1.0%
FDG	$34.90	$35.00	0.3%
MSTR	$94.36	$94.38	0.0%
ELX	$17.85	$17.72	-0.7%
RAIL	$60.94	$60.36	-1.0%
FTO	$57.52	$56.00	-2.6%
PGI	$7.71	$7.50	-2.7%
TGIS	$10.65	$10.19	-4.3%
ANF	$61.13	$57.85	-5.1%
IVII	$10.93	$10.21	-6.6%
PACR	$32.53	$29.51	-8.8%
PONR	$32.97	$27.77	-15.8%
DLX	$26.36	$21.49	-17.0%
TBL	$34.50	$27.63	-19.9%
HW	$37.42	$27.45	-26.6%
Total Gain/Loss			-$1,053
Benchmark Gain/Loss			-$3,004
Annual IRR			-3.1%

The King & I: Shall We Dance?

King Pharmaceuticals (KG) – I don’t think I need to spend much time on the profile. Pretty clear where KG makes their money. The key point is that they specialize in “branded” pharmaceuticals, which I suppose is the opposite of generics. You’d have to be living under a rock to not know that the big Pharma stocks have been under-performers the past several years. OTOH (see I know some of the cool shorthand), the market seems to be entering bear mode and conventional wisdom says that Pharmaceutical and food stocks are the places to get defensive.

Here are some facts:

• In the 1^st quarter Revenues increased 31% Y o Y.
• Excluding a special one-time fee, diluted earnings per share increased 42%.
• Balance sheet looks strong with just 400m in debt and a 1.9 current ratio.
• Current price is $17.80 vs. a 52-week range of $9.22 to $20.00.
• Market Cap: $4.31b
• Earnings Yield (MFI): 16%
  
• Return on Capital: 100%

Interesting company. I’ll tell you, the 31% growth in revenues is very impressive. You always need to know more about Pharmas, such as what is in the pipeline and what blockbuster drugs may become generic. Not a small cap stock, but I think that KG will make my list of stocks to review more, especially if I want to become a bit more defensive. There is also the argument that the Pharmas will be benefiting from the new Prescription plans, which should make prescriptions more available and affordable to senior citizens. Finally, I don’t have much drug exposure in my portfolio (not that I have had a positive experience with any, particularly one stock that begins with the letters “Pf”).

So to recap, my further review list has OVTI, RAIL, KSWS and KG.

**********************************************************************************

Orckit Communications (ORCT) – ok, I will admit it. As a fan of Lord of the Rings, I would have trouble buying Orckit Communications just because I would have to look at the symbol. What is an Orckit anyway? A place? A person? Let us ask Google. I don’t see anything beyond the company. Must be a made up name. I won’t hold it against them.

Checking their profile, ORCT is an Israeli company which develops and sells telecommunication equipment. Helps telecomms with HDTV, Broadband video etc.

• Revenues up 21%
• Delays in expansion into Japan
• Strong Balance sheet.
• Expect forward earnings to be between $0.68 and $1.20

They are a cheap company considering high tech and growth. The telecomms and cable companies are in an all-out war for control of television, internet, telephones, video-on-demand etc. It seems to me that companies that can offer innovative solutions will have plenty of cash flowing their way. I think ORCT is worthy of further consideration.

Stock # 8 - Agilysys

Agilysys (AGYS) – I have to admit that I love the made up names of companies. I just picture a company going to an ad agency and saying, “we need a new name that will invoke the image that we want to invoke.” Like Genetech, I guess it is a blend of Genetics and Technology. Microstrategy would be another example. I suppose Agilysys connotes Agile Systems, I don’t know. Of course the other trend is to shorten everything. Burger King becomes “BK”, Kentucky Fried Chicken is “KFC” and Minnesota Mining and Manufacturing becomes “3M”.

I read the profile and Agilysys kind of sounds like a mini-IBM. They create computer solutions. They do some consulting. They sell hardware and software. It does seem like their customer is businesses. Right now I do prefer the customer to be a business than a consumer as I think consumers are getting tapped out with higher gas prices and the housing market having peaked along with interest rates rising.

AGYS just reported earnings last week. I love the summary from the chairman. Do these guys just speak off the cuff or is it scripted?

Arthur Rhein, chairman, president and chief executive officer of Agilysys, said, "I am extremely pleased with the fourth-quarter and full-year results we reported today. Our highly-skilled and motivated people continue to dedicate themselves to providing customers more complete enterprise computer technology solutions and our focus on higher-value is evident in our performance."

Let’s look at some key facts:

• Almost 11% Y o Y growth this quarter.
• Gross Margin increased from 12.5% to 13.9% as Software sales (higher margin) were increasing faster.
• They expect to grow 6% to 8% in Fiscal 2007.
• Stock Price is $16.77 with a 52-week range of $13.02 to $21.25.
• Market Cap is $512m.
• Earning Yield is (per MFI): 14%
• Return on Capital is 50% to 75%
  
• Current Ratio is 1.31 with most of it being accounts payable.

I don’t know, I am having trouble getting too pumped up with Agilysis. I don’t see where the have any competitive advantages or pricing power. To me they look pretty fairly priced.

On deck: King Pharmaceutical.

Rail Baron

Freightcar America (RAIL) – I could not resist the title. Rail Baron (Rail Baron Fanatics) is one of the great board games of all time. Kind of like Monopoly with railroad lines…but better. Has anyone noticed that corporate America has gotten a sense of humor when picking stock symbols? It is almost a marketing tool. Sealy is ZZ (ha-ha). Genetech is DNA. Taco Bell is YUM. Ok, ok, enough irrelevant chatter! On with the analysis!

I already like the name and concept before researching any further. Remember how FDG complained about increasing transportation costs? That means trains for a coal company. Norfolk Southern, Burlington Northern, Union Pacific (all great names from my Rail Baron game) are all seeing their businesses boom. They are flush with cash. I think people may be switching from trucks to trains as they’re more fuel-efficient. If ethanol takes off, trains will be needed to ship the grains to the refineries. Hey, I am starting sound like Cramer.

Not many surprises in reading their profile. They build rail cars. They are the GM (wait bad analogy, let us say Boeing) of the train industry. The one surprise (to me) was they’ve been around since 1901. Move over GM and BA!

Key Facts

• Revenues up in 1st quarter 2006 76% Y o Y!
• Orders for new railcars were 1,031 vs. 5,035 made in 1q 2005.
• Backlog is 17,794 vs. 14,146 at 1q 2005 (26% increase).
• Stock price is $63.12 with a 52-week range of $18.17 to $78.34
• Market cap is $793m
• Current Ratio of 1.576 with virtually no long-term debt.
• Earning Yield (per MFI): 14%
  
• ROC (per MFI): > 100%
  

I gotta believe this is a market with high barriers to entry. I am not even sure whether foreign competitors can play. The CEO did state that, “orders can be uneven (explaining the orders in 1st quarter) and that business outlook was strong”. RAIL seems to have a very strong balance sheet.

It all seems so good. Why is the short ratio 9%? How come they were so cheap within the past year? Could they drop back down to those levels? Can customers change their minds or do they pay in advance? How long does it take to build Rail Cars? How many are built in a quarter (what does their backlog represent)? What if the economy cools, will this cool super fast? How many questions can I ask? Do these questions really add anything?

All of this analysis thus far does make me wonder whether it is relevant. For instance I have focused on the current ratio on several stocks. Is it relevant? If it is, would JG not have included it in his MFI? Am I looking at it just because I do not like to be in debt? JG does argue that Accounts Payable are essentially an interest free loan. And Long Term debt is not necessarily bad if the interest rate is reasonable and the debt allows you to expand and make more money. At least I hope this isn't too relevant as the analysis made me look back at my earlier MFI stocks and several of them (like HW) are in serious debt. Oh well.

That 76% increase in revenues is eye-popping. I think RAIL needs to be on my short list with OVTI. KSWS and ASEI also merit watching so far.

Too Good to "V-Tru"?

Vertrue (VTRU) – I wondered, “what on earth does this company do?” You know, I read their profile (Profile) and I am still not sure I understand. “Consumer Services Marketing”, sounds like a fancy name for Spam, unsolicited telephone calls and junk mail. But I won’t hold that against them… let us see if they make money.

• Revenues increased this quarter 10% Y o Y.
• They raised guidance for 2006.
• Net income decreased 5% due in part to FASB 103. I have been seeing this in a bunch of earning reports as companies now have to expense options. I call it “The World According to GAAP”.
• Market Cap: $374m
• Current Price: $38.27 vs. 52 week range of $33.33 to $45.39
• Current Ratio = .666

I think I need go no further. Like FTD, these guys are in hock to their eyeballs. They have assets of $466m, of which $268m are intangible. They have liabilities of $490m, of which $237m is long-term debt. In fact, even with their soft and squishy intangible assets, their total equity is below zero!?! In accounting lingo this is called a “deficit”, a term all US citizens should be familiar with. In Justadrone lingo, this is called, “Run Away!”

This is the 2^nd company from the MFI list that has really been in debt with few tangible assets. I will be watching these companies to see how they fare. I guess they do well per MFI as the formula in a weird way values intangible assets higher than tangible assets as you don’t need to invest more capital in them. Maybe I have an unfair bias against these companies in debt. A year from now, I’ll review these postings and see if I was too harsh.

Meanwhile, I will sound the gong! Next up, RAIL.

Fine Dividend Group - FDG

Fording Canadian Coal Group (FDG) is a basic resource play. They mine coal. I like the idea of coal stocks as coal has become much cheaper than oil. And with new and improved coal scrubbers, even high sulfur coal has added value. Looking further, FDG seems to specialize in metallurgical coal for the steel industry.

The first number that hits you between the eyes on FDG is the dividend. Almost 14%. The next item that strikes me is how “cheap” the company is right now. By definition, MFI companies are all supposed to be “cheap” as that is how you make it through the screens. But FDG is the cheapest of the cheap. The chart below compares the trailing PE for FDG versus some other coal companies:

Ticker	Trailing P/E
FDG	5.85
CNX	12.97
NRP	14.69
BTU	17.36 (next year)
ACI	13.09 (next year)

Why are they so cheap? Is everyone else dumb? Let us review the MRQ.

• Coal prices doubled in the 1^st qtr 2006 from 1^st qtr 2005.
• Canadian $ has strengthened vs. US dollar.
• Sales volumes in 1^st Q 2006 actually dropped 9% measured in tons.
• Transportation costs are up 26% (mainly rail costs).
• Earning Yield: 15%
  
• Return on Capital: > 100%
  
• Current Price: $34.65 with 52-week range of $27.75 to $45.15
• Current Ratio: 1.42 with $320m of debt.
• Market Cap: $5.1b

Hmm, it is interesting that the amount of coal they sold in tons actually dropped 9%. They stated it was because delivery was refused and that contracts with China were cancelled. Perhaps with the strong Canadian Dollar vs. US Dollar companies are opting not to buy the Canadian Coal?

The debt seems a little bit high. I actually own CNX. They also have a high debt ratio, so perhaps that is “normal” in the coal industry. Cash must be pouring in, so you don’t need to keep much on hand (thus the high dividends).

FDG is a tough call. I will probably pass on them as (a) I already have CNX in my non-MFI portfolio and (b) I don’t feel happy about sales in tons dropping. If I didn’t have CNX and/or I wanted income from my stocks (not important right now), I think FDG would make it to the next cut.

Waiting for the Other Shoe to Drop

K-Swiss (KSWS) - I already own Timberland. Should I own two shoe stocks? I am not a big fan of their shoes. I tend to be a Reebok man. Pretty funny, my eight year-old son only wants to wear Reeboks as well, “the acorn doesn’t fall far from the tree…”

Enough Philosophy. What about K-Swiss? Good question. My first thought was where did they get their name? Are they from Switzerland? Let’s see, they are in Westlake Village, California. Wait, here we go! They were founded by two Swiss brothers!
K-Swiss Profile.

Financial Highlights

• Revenues in the 1^st Quarter were down 2.1% Y o Y.
• Domestic Sales are way down: 12.1% but International Sales were up 31%
• Future Orders for next 6 months are down 1.2% with the same domestic/international splits.
• Current Price: $27.35. 52 week range: $26.40 to $36.89
• Current Ratio: 7.45
• Cash per Share: $5.585
• Market Cap: $934m
• Earning Yield: 14% (per MFI)
  
• Return on Capital: 75% to 100%

This is a true value play. Very strong balance sheet, but company is struggling with sales in the US. Down 12% is a ton. However, that news seems to be reflected in their stock price. If they manage to turn their sales around, the stock price should jump back towards $36. Also, there has been some consolidation in the sneaker business and K-Swiss at these prices might be interesting acquisition target.

I think KSWS is worthy of future consideration. They will make it on to my short list.

FTD - May Flowers or May Showers?

The next stock to consider is FTD. I didn't actually realize that this was a company. I mean everyone (my age at least) has used FTD to order flowers long distance. Do people still need that service today with the Internet??? Let us look more closely.

Profile - well, they are actually on the Internet ( http://www.ftd.com/). They sell flowers and similar items via phone and internet directly to you and me. Then they provide services to floral companies. They just raised guidance the other day, I suppose you could say "everything is coming up roses".

Key Facts

• Market Cap - 362m
• Earning Yield: 10% ROC: 31% (per this handy link: MF style rankings based off Yahoo Finance )
  
• They have a current ratio of .629. That means for every dollar of short term debt, they only have 63 cents of short term assets.
• Revenues grew 3% Y o Y in most recent quarterly report.
• 52 week range: $9.02 to $13.02 with current price of $12.96
  
• It should be noted that Easter was in 1st qtr in 2005 and 2nd qtr in 2006. With Easter adjustment, revenue growth was 9%.

I think I have looked far enough. This is a company I would not touch with a ten foot sunflower (watch them double this year!). Many of these recent IPOs (these guys went public in 2005) are companies that Hedge Funds have purchased, loaded with debt and then sold off via an IPO. It is an unsavory practice and certainly Caveat Emptor. Of their $565m of assets, $121m is for their trademark and $337m is goodwill. That makes their tangible assets equal just over $100m. But they have very tangible liabilities of $370m. Yuck.

Next! (I can't believe FTD made it through the screen)

ASEI - Can They Keep It Up?

American Science & Engineering Inc (ASEI) - Another very interesting company. They create scanning and x-ray equipment for airports and helping homeland security. They have had pricing power, but that may be waning as OSIS and LLL have competing products. Here are some highlights from the recent quarter:

• They did have a blowout 2005-06. Sales were up Y o Y close to 50%.
• They do have some debt, but not a big deal with a current ratio over 5.00
• The stock price is $61.35 vs a 52 week range of $35.95 to $93.86
• 11% Earnings Yield and 75% to 100% ROC

They are a "smaller" cap company with a market cap of $500m. Looks like a solid company, the big question mark is whether future earnings and margins can hold up? They seem innovative and seems to me that the demand for scanning equipment could go well beyond airports. I could see train stations, Amusement Parks, Stadiums etc going that route in this brave new world.

Currently I would probably go for OVTI over ASEI unless their prices shift significantly over the next two to three weeks.

Next!

Taking Stock: OVTI

Omnivision Technologies (OVTI) specializes in making semiconductor chips for video devices such as digital video cameras and video on cell phones. Business is booming. Sales and income have been very strong. Here are some highlights from their last quarter report:

• Revenues were up about 37% Y o Y
• Gross margin improved from 36% to 40%
• Breaking into new market - Autos (GPS?)
• Current price $28.52 vs 52 week range of $11.74 to $34.49
• Earnings Yield (per MFI) 9%
• ROC (per MFI) > 100%
  
• No debt

I like the company. They seem very innovative and have great opportunities in front of them. Not sure what the rest of the list will look like, but let us say that the bar has been set high. "OVT-High".

I Want a New Stock

I Want a New Drug Stock

I will likely be adding another stock by Mid-June. It is never too early to begin considering the candidates. One point about MFI, the lists really don’t change very quickly. Only when either new earnings data comes out or if the stock goes on a spurt.

I did a pull of stocks from the website which gave me 50 stocks to think about. I quickly pared that list down based on having already nixed certain stocks and the other stocks were nixed as I want to try to be diversified. Here are the current candidates:

Symbol	Trade	Market Cap	EBITDA	EPS (ttm)
OVTI	28.58	1.52B	110.44M	1.48
ASEI	60.85	497.69M	49.81M	3.27
FTD	12.95	362.30M	65.96M	0.74
KSWS	27.20	933.29M	105.00M	2.10
FDG	34.7236	5.10B	877.12M	5.808
VTRU	38.35	376.83M	94.40M	2.45
RAIL	63.12	793.42M	113.10M	5.18
AGYS	16.47	502.73M	59.83M	0.64
KG	17.73	4.29B	782.87M	0.41
ORCT	12.95	199.25M	22.02M	1.44

What am I looking for? I think that ideally you want stocks that have some pricing power. I also want stocks that have increasing earnings and revenues. All else being equal, I suppose I would rather have a small cap (under $1b) than a large cap. A strong balance sheet would be a positive as well. Finally, I would want to read the most recent news and make sure there aren’t any death knells out there.

During the upcoming week, I'll try and comment a bit on each candidate and see if I can convince myself of the best buy.

It was the Best of Times: Paint it Black

Charles Dickens once said in a Tale of Two Cities, "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."

And so it is with my MFI portfolio. Most importantly, I want to be in the black. The secondary need is to beat the benchmark. And of I course I want to live by the song, "Don't Worry, Be Happy" and retire at age 50 to be a ski bum.

The past few weeks have thrown my MFI portfolio from being up 4 to 5% to being down over 2%. That is about an 8-point swing. Not quite the 25% drop the Russian stock market has had in May... but this isn't from Russia (with love). That has put me in the Red until today. Calloo, Callay!

Make Mine a MTEX

Yesterday I decided to pick MTEX over PLAY as my 20^th MFI stock. I think I had really decided after my posting on Sunday evening. Then when MTEX dropped during the day, I picked it up at $13.11. In reading a boatload of earnings reports, there is a major change in 2006. Many people may think it "doesn't matter", but firms are now required to expense the costs of their stock options they give to employees. This is making comparisons for many companies with 2005 unflattering until you look at things on a "non-GAAP" basis. But it is a real cost and can tend to snowball.

That is actually one reason I liked MTEX over PLAY. MTEX seems like a low-tech company. They have thousands of "associates" all over the world selling their products (I vision them like Avon reps). But I don't think they are incented by stock options, but rather travel awards, which should be cheaper in the long run.

Keeping Score

When I go to watch a baseball game, I like to keep score. Balls and strike, where the ball gets hit etc,

Being a numbers guy, I am slightly anal about tracking performance. I will be tracking my performance in two distinct ways:

(1) I will be tracking the Annualized Internal Rate of Return (IRR for the geeks) on the cash flow generated by my portfolio. This is a highly complex calculation that I could not perform easily sans my Dell. It is analogous to a return in a year on any investment, except it accounts for the fact that I don’t buy all my stocks on the same day (nor will I sell them) and it adjusts for dividends and such as well.

(2) I am also running a completely parallel portfolio in which every time I buy a MFI stock, I also invest the same funds into IWV (an ETF of Russell 3000). This is the benchmark I need to trounce.

(3) While I will keep my investment amounts private, I will speak of them in this blog as if I always invested $10,000 per stock (in year 1… obviously if they double every two years I’ll be at $20,000 then).

Now you (the “bloggee?”) are up-to-date. I will try and post my trial, tribulations and hopefully successes on this page constantly wondering, “is anybody reading this?” Even if no one reads it, I suppose it is therapeutic to spill my guts from time-to-time.

Tale of Two Stocks

I will likely buy my 20th MFI stock this week. The two stocks that I am considering are:

(1) MTEX - a company that makes nutritional supplements etc (think GNC).

(2) PLAY - the supplier of Ipod parts recently left at the altar by Apple. Some people might think this is Playboy, but that is PLA.

Here are some key points regarding the two companies.

MTEX

• Market Cap: 360.1m
• Price: $13.41
• 52 Week Range: $8.17 to $20.25
• TTM EPS: $1.08
• Pre Tax Earning Yield: 15%
• Pre Tax Return on Capital: +100%
• 2.4% dividend
• Cash per Share: $2.09

1st Quarter Highlights:

• 16% Y o Y Growth in Sales
• Lowered Operating Expenses by 1.7 points
• Debt Free Balance Sheet

PLAY

• Market Cap: $267.16m
• Price: $10.82
• 52 Week Range: $10.40 to $33.19
• TTM EPS: $1.84
• Pre Tax Earning Yield: 63%
• Pre Tax Return on Capital: +100%
• no dividend
• Cash per Share: $7.77

1st Quarter Highlights:

• Revenue of $72.3m.
• EPS of 40 cents.
• However with loss of Ipod business, 2nd quarter expects to drop to $30m to $40m
• EPS is forecast to drop to (0.03) to 0.05.

So the real question is does one expect PLAY to find other places to sell their wares? They have a strong balance sheet. They seem to have some innovative products. Bad news seems to be priced in the stock. They are certainly in the midst of what is popular right now. But to be frank, the MFI approach assumes that the past is a reasoanble predictor of the future. And while it is "possible" for PLAY to get back to 2005 profitability and they are not necessarily a "bad" buy, I don't think they fit the MFI mold.

Hmmm, I am talking myself out of PLAY. I just can not believe they will be able to find anything as good as Apple. MTEX actually looks pretty good. It is always a positive sign to me that a company steadily increases their dividend. PLAY probably has more upside, but they could be stuck for a while if they don't find a few new partners.

Buy and Hold Except....

The MFI approach is to buy and hold for a year equal $ amounts in 25 to 30 stocks (selected from a list meeting certain characteristics). Stocks that are losers, get sold just before a year to realize short term capital losses. Winners are held for a year and a day to realize long term gains and save on taxes (always a good idea!).

There is my mysterious 20^th stock, NCOG (Non-Commissioned Officer Group I think). I have already bought it and sold it, against the rules of MFI. The week after I bought NCOG, their chairman announced his intent to take them private at a 42% premium. As a 42% gain in a week sounded “purty” darned good to me, I sold as the book didn’t precisely cover that case.

My Portfolio

I will admit it. I get emotionally attached to my stocks. I hate to admit I have a bad stock. I like to celebrate the successes. I love stock symbols. They can be fun. Here are the cards I am currently holding, the dirty dozen (+7), the start of my fortune (I hope):

ANF – I bought them one day too early. They had fallen 5 or 6% and I jumped in. The next day they dropped another 5%. Steady gains since and great quarterly report. Heck, even Cramer loves them, but I picked ANF before that!

CHKE – I know, I had never heard of them either. That is a beauty of MFI, it gets you to research stocks that you did not even know existed. Kind of a middle man in clothing, pays a 6% dividend.

DLX – Maybe not my most savvy purchase. They make the old fashioned paper checks that your granny might still use. But they were knocked down from $46 to $25 and paid a 6% divdend and I didn’t have other stocks like this.

ELX – A high tech flier from the hangover days of the bubble. You’d have to be a computer geek to understand their profile, something about IOCs and HBAs.

FTO – They refine oil and makes lots of money since everyone is paying so much for gas. Capitalism at its best. I call this stock Free To Own.

HW – They have technologies to turn coal into diesel. I know, not quite Lead into Gold, but a close 2^nd. They have been pretty beaten up lately, so I call them Head Wind.

IVII – They make software which allows your legal DVDs to play on your laptop (perhaps even illegal, I don't know). I encourage all of you to go watch a movie on your laptop.

MGLN – The profile says “behavioral health disease management”. Sounds like an area ripe for growth!

MSTR – My 2^nd bubble high flier, this one was a real roller coaster in 1999-2000! They are a software company and they make a lot of money. I just call them Master of the Universe.

NSS – boring company that makes pipes etc in Kentucky. All they do is make lots of money selling the pipes etc to oil drillers. I call them “Nice”.

PACR – I am an Indiana Pacer fan, but that has nothing to do with this stock. Also, 6 of my 19 stocks start with P. But that has nothing to do with this stock which supplies logistics to the transportation industry.

PCU – A little copper anyone? Did you know it costs the US mint more than a penny to make a penny? That is a losing proposition, but I hope the Big Wheels Keep on Rolling.

PGI – Pig switched around a bit. The G stands for Global and they provide global business services. And the P is for Premiere… with Premiere and Global in the name seemed like a slam dunk!

PNCL – A profitable airline. Just think how much they’ll make if jet fuel ever drops in price.

PONR – I love the symbol, I immediately thought of Point Of No Return. Just a boring small company that makes chemicals for businesses… profitably.

PTEN – whenever I see this symbol, I think of the magicians Penn and Teller but it doesn’t quite fit. I must be dleysxic. Another energy stock into drilling and such. I am afraid my MFI portfolio isn’t all that environmentally friendly. This is the last of my “P” stocks!

TBL – Timberland shoes. I think Table when I see the symbol. TBL has struggled a bit, seems the EU has slapped a tariff on inexpensive Asian-made shoes and boots. Where is free trade when you need it?

TGIS – my favorite stock symbol, “Thank God It’s Saturday!” Small Dallas company that provides consulting and management services to small businesses. I did get a kick from their recent headlines: “Thomas Group Ranked Number One Fast Track Company”. I thought, Wow! Pretty impressive. Then I read the article, and it said “Number One Fast Track Company in Dallas/Ft Worth.” Not quite as impressive, I call that lying by omission.

UST – Last of my nifty nineteen, but not least. I know all you chewing tobacco fans of Skoal and Copenhagen recognize UST. I used to think this was the symbol for US Steel, in actuality it is US Smokeless Tobacco. Just a slight difference.

There you have it, faithful readers (you are faithful aren't you?). We will be tracking this weird mix of stocks over the upcoming year through this blog. But they have one element in common, yes... "hocus-pocus" and (crossing my fingers) a good shot at outperforming the market. I will likely add 6 to 11 more stocks through the remainder of 2006 if I can scrape up some spare change. That may be iffy as Uncle Sam just gave me a nasty surprise with the new tax bill, but that is for another day and another blog.

Picking my First Stocks

Picking my First Stocks

It is human nature to try and improve things. I suppose that is good and has led to much innovation. The natural MFI question: “how do I pick the “best” stocks from JG’s MFI list”? While I would be ecstatic with 30% returns for the rest of my life, I would be ecstaticer (hmm, my spell check didn’t like that one) with 35% or 40%. Using the rule of 72, a 30% return will double your investment every 2.4 years. Would it not be neater to get 36% and double every 2 years (I know you really need 41% to double!)??? The math gets so simple then! I start with $10,000 and in 30 years I have, , 327,680,000! I wonder if that is before or after taxes? My kids will be so happy!

So many choices:

• Large cap or small cap stocks. JG’s research supported that small caps did better, though to be fair he actually said that large caps did worse.
• Beaten down stocks vs. growth stocks. Both kinds come out of the formula.
• I thought about cross-referencing the list against Cramer’s lightening round picks. A decent approach perhaps assuming Mad Jim doesn’t change his mind the next day, “sell, sell, sell, sell!”
• I saw a suggestion about Dogs of the Dow approach, pick the ones with the highest dividends. I like dividends.
• How about diversification? Should I be buying stocks in sectors where I am underweight?

I could go on and on. It was making my head hurt. Just typing about it right now is making my head hurt. So I won’t bore you (gentle reader) any more. Suffice it to say I came up with 19 stocks purchased between 2/24 and 5/16. Technically I bought 20 stocks and sold one, more on that to come!

The Genesis

“Magic Formula Investing” certainly sounds like hocus-pocus. If you tell people you are using a Magic Formula, you will be subject to ridicule. So I tend to prefer the acronym “MFI”. Everything is shrtnd nwdys anwy. And it sounds much more mysterious.

I am a numbers guy, through and through. Degree in Math and work with numbers everyday as an actuary. Has been 23 years since I graduated, so I guess you could say I have seen and crunched a lot of numbers. Ok, I am a nerd. I said it. I feel better already!

I first heard about MFI in Smart Money magazine. I don’t typically read Smart Money Magazine, but I was flying home after a little ski trip and decided that reading SMM (see how easy it is?) was appropriate après-ski for a numbers guy.

I still have the magazine somewhere in the basement, but I am too lazy to look for it, so I’ll type off the top of my head. In the magazine they introduce some type of stock screener monthly. Well, the February Screener was the MFI approach as discussed in Joel Greenblatt’s “Little Book that Beat the Market”. His method seemed too sensible to actually work. The point that caught my numbers eye was that JG had claimed to have back-tested his method in an unbiased form and had trounced the market averages with the approach over the past 17 years.

I believe I am a savvy investor. We all do don’t we? Just as we all believe our congressman is better than average. I watch Mad Money (much to the disgust of my wife), I read the Wall Street Journal, I track my portfolio, I subscribe to some newsletters and I have done reasonably well the past 4 years. But to be honest, I have never had a strategy. This MFI idea was intriguing. “Very Interesting” as Artie Johnson would say (as I show my age).

SMM listed the website ( http://www.magicformulainvesting.com/ ) that did all the number crunching and provided a list of stocks that met the criteria of MFI. On February 17^th, I created a hypothetical portfolio of 50 stocks from the list with the intention of watching their performance. For those who care, that group of 50 stocks is down (as of May 18^th) 0.7% while the benchmark Russell 3000 is down 1.1%. Aha!

Within a week, I actually decided to shell out the $20 and buy the Little Book that Beat the Market from my friendly B&N. Sipping a Starbuck’s Latte, I read his humorous book with analogies about a bubblegum business. While seemingly too good to be true (and most things that seem that way are), JG claimed that his MF had been tested ten ways till Friday. The actual numbers don’t matter, people can buy the book to get further details but the gist of his book was that his approach of picking 25 “value” stocks every year and then holding them for a one year period yielded returns over a 17 year period of about 30% annually. I’d take that. He tested it by year by quarter, so he had 68 different portfolios. He spilt the entire stock market into deciles based on the MF and the annual returns were perfectly correlated. Unless he rigged the data in some fashion (and he “seemed” like too nice a guy to do that) the results were quite convincing and in the author’s words, “quite satisfactory”.

After reading the book, I was gung-ho to put some real money to work. And so I have. It is now about 2 ½ months later and I have 19 stocks. This blog will track my results and my emotional swings and thoughts. Heck, I have always wanted to try this blog thing anyway. Task one: what does “blog” mean? And more importantly, does this make me a “blogger”? More tomorrow.