I was looking at my Magic Formula Index for the year. As a reminder, I create this index of 50 stocks at the start of each year and track for a year, at which point I reconstitute the index. So it is really like my monthly tracking portfolios, except it is once a year and I follow each position very carefully to make sure I account for spin-offs and special dividends etc. (I try to do that for monthly tracking portfolios as well, but there is a greater chance I miss one from time to time).
The index is now up a staggering 47.6% so far this year. While it could certainly fall backwards, that is the best year in my records for MFI! Here is the table by year. You will note we have now pulled ahead of the Russell 3000 in total:
| Annual | Inception to Date | |||
| Year | Russell | Russell ITD | MFI ITD | |
| 2006 | 11.40% | 15.03% | 11.40% | 15.03% |
| 2007 | 4.09% | -6.69% | 15.96% | 7.34% |
| 2008 | -37.05% | -37.97% | -27.00% | -33.42% |
| 2009 | 32.51% | 45.18% | -3.27% | -3.34% |
| 2010 | 18.38% | 22.77% | 14.50% | 18.67% |
| 2011 | -0.56% | -10.47% | 13.87% | 6.25% |
| 2012 | 16.38% | 9.70% | 32.52% | 16.56% |
| 2013 | 29.18% | 47.64% | 71.19% | 72.08% |
You will again note that the 18 point out-performance this year ties in pretty closely to my own MFI performance, which is beating the R3K by a bit more than 20 points. When I look at this table, I think, "what happened in 2011?". If that had not been such an atrocious year, we could really say definitively that TLBTBTSM does.
Here are the bottom 20 stocks from that index:
| Stock | Initial Price | End Price | Percent Change | Mkt Cap |
| YLWPF.PK | 6.38 | 0.18 | -97.2% | 3,201 |
| SCEI | 6.98 | 1.06 | -84.8% | 111 |
| 34.90 | 10.66 | -69.5% | 949 | |
| NEP | 5.81 | 2.00 | -65.6% | 170 |
| 21.07 | 7.82 | -62.9% | 1,685 | |
| 10.13 | 3.83 | -62.2% | 1,060 | |
| CRME | 6.29 | 2.61 | -58.5% | 392 |
| 39.68 | 16.57 | -58.2% | 355 | |
| 5.12 | 2.15 | -58.0% | 441 | |
| 43.66 | 20.98 | -51.9% | 1,714 | |
| LPS | 29.80 | 14.85 | -50.2% | 2,696 |
| LINC | 15.13 | 7.96 | -47.4% | 344 |
| 12.99 | 7.49 | -42.3% | 157 | |
| 35.97 | 21.34 | -40.7% | 3,195 | |
| ASTX | 2.72 | 1.76 | -35.3% | 158 |
| 24.05 | 15.60 | -35.1% | 2,232 | |
| 18.21 | 11.91 | -34.6% | 167 | |
| TNDM | 14.93 | 10.75 | -28.0% | 478 |
| 26.40 | 19.65 | -25.6% | 1,103 | |
| 19.22 | 14.57 | -24.2% | 645 | |
| GTAT | 9.34 | 7.11 | -23.9% | 1,376 |
So you had a trucking company go bankrupt leading the list. SCEI and NEP were part of the Chinese reverse merger scam. CECO, COCO and LINC were all for profit education stocks that lost so much value when people started noticing that graduates were having trouble getting jobs. AMED and AFAM were home hospice type stocks that came under scrutiny regarding billing practices.
I am not sure what the moral is, but clearly a potential pothole in MFI is that a number of stocks from a certain industry grouping can get in the list as they are all under some sort of "cloud". If this cloud produces rain, it can ruin the year. Of course this type of sword can cut both ways. Look at the stocks from thiis year (note, due to some technical problems with Yahoo this morning, these prices are actually as of Thursday, not Friday):
| Index | Stock | Start | Last Quarter | Current | YTD Change | Quarterly Change | Shares |
| 1 | APOL | 20.92 | 20.81 | 26.30 | 25.7% | 26.4% | 11.14 |
| 2 | AGX | 18.00 | 21.97 | 23.43 | 30.2% | 6.6% | 12.95 |
| 3 | BAH | 13.92 | 19.61 | 19.06 | 36.9% | -2.8% | 16.75 |
| 4 | CA | 21.98 | 30.42 | 33.59 | 52.8% | 10.4% | 10.61 |
| 5 | CPLA | 28.23 | 56.56 | 65.25 | 131.1% | 15.4% | 8.26 |
| 6 | CF | 203.16 | 211.43 | 216.22 | 6.4% | 2.3% | 1.15 |
| 7 | CSCO | 19.65 | 23.77 | 21.98 | 11.9% | -7.5% | 11.86 |
| 8 | DELL | 10.14 | 13.91 | 14.02 | 38.3% | 0.8% | 22.99 |
| 9 | DLX | 32.24 | 42.41 | 50.01 | 55.1% | 17.9% | 7.23 |
| 10 | DMRC | 20.70 | 20.53 | 18.65 | -9.9% | -9.2% | 11.26 |
| 11 | DLB | 29.33 | 34.51 | 35.23 | 20.1% | 2.1% | 7.95 |
| 12 | GME | 25.09 | 50.48 | 49.63 | 97.8% | -1.7% | 9.29 |
| 13 | GNI | 67.20 | 74.25 | 80.42 | 19.7% | 8.3% | 3.47 |
| 14 | GTAT | 3.03 | 8.51 | 9.92 | 227.2% | 16.5% | 76.93 |
| 15 | HLF | 32.94 | 70.67 | 69.62 | 111.4% | -1.5% | 7.08 |
| 16 | HFC | 46.55 | 43.71 | 48.02 | 3.2% | 9.9% | 5.01 |
| 17 | IDCC | 41.09 | 37.64 | 32.91 | -19.9% | -12.6% | 5.67 |
| 18 | INTX | 9.48 | 9.37 | 9.18 | -3.2% | -2.0% | 24.59 |
| 19 | ESI | 17.31 | 31.00 | 38.44 | 122.1% | 24.0% | 13.47 |
| 20 | JCOM | 30.60 | 50.23 | 47.69 | 55.8% | -5.1% | 7.62 |
| 21 | KLIC | 11.99 | 11.55 | 12.63 | 5.3% | 9.4% | 19.44 |
| 22 | LPS | 24.62 | 33.57 | 34.94 | 41.9% | 4.1% | 9.47 |
| 23 | MANT | 25.94 | 29.39 | 29.54 | 13.9% | 0.5% | 8.99 |
| 24 | MSFT | 26.71 | 33.97 | 38.37 | 43.7% | 13.0% | 8.73 |
| 25 | NATR | 14.48 | 20.81 | 20.52 | 41.7% | -1.4% | 16.10 |
| 26 | NSU | 4.28 | 3.24 | 3.30 | -22.9% | 1.9% | 54.47 |
| 27 | NTI | 25.44 | 22.90 | 27.66 | 8.7% | 20.8% | 9.16 |
| 28 | NUS | 37.05 | 96.64 | 120.25 | 224.6% | 24.4% | 6.29 |
| 29 | PDLI | 7.04 | 8.27 | 9.65 | 37.1% | 16.7% | 33.11 |
| 30 | PETS | 11.10 | 16.75 | 16.09 | 45.0% | -3.9% | 21.00 |
| 31 | PBI | 10.64 | 18.94 | 24.61 | 131.3% | 29.9% | 21.91 |
| 32 | POOSF | 1.42 | - | - | -100.0% | 0.0% | 164.63 |
| 33 | POZN | 5.01 | 5.73 | 6.80 | 35.7% | 18.7% | 46.53 |
| 34 | QCOR | 26.72 | 58.75 | 60.40 | 126.0% | 2.8% | 8.72 |
| 35 | RTN | 57.56 | 78.17 | 88.49 | 53.7% | 13.2% | 4.05 |
| 36 | RPXC | 9.04 | 17.54 | 16.60 | 83.6% | -5.4% | 25.79 |
| 37 | SAI | 11.32 | 17.27 | 19.19 | 69.5% | 11.1% | 20.59 |
| 38 | STX | 30.42 | 44.52 | 49.42 | 62.5% | 11.0% | 7.66 |
| 39 | SVLC | 2.52 | 1.77 | 1.52 | -39.7% | -14.1% | 92.51 |
| 40 | SAVE | 17.73 | 34.27 | 44.67 | 151.9% | 30.3% | 13.15 |
| 41 | STRA | 56.17 | 41.52 | 38.21 | -32.0% | -8.0% | 4.15 |
| 42 | TNAV | 7.99 | 5.84 | 7.10 | -11.1% | 21.6% | 29.18 |
| 43 | TZOO | 18.99 | 26.52 | 20.98 | 10.5% | -20.9% | 12.28 |
| 44 | UIS | 17.30 | 25.19 | 26.85 | 55.2% | 6.6% | 13.47 |
| 45 | USMO | 11.68 | 14.54 | 15.25 | 30.6% | 4.9% | 19.96 |
| 46 | USNA | 32.93 | 86.79 | 70.72 | 114.8% | -18.5% | 7.08 |
| 47 | EGY | 8.65 | 5.58 | 6.00 | -30.6% | 7.5% | 26.95 |
| 48 | VCI | 25.78 | 29.50 | 30.14 | 16.9% | 2.2% | 9.04 |
| 49 | VG | 2.37 | 3.14 | 3.25 | 37.1% | 3.5% | 98.36 |
| 50 | WCRX | 12.04 | 23.18 | 23.18 | 92.5% | 0.0% | 19.36 |
You can see on this list a number of MLM type firms (HLF, USNA and NUS for instance). But they all register as having huge years as the SEC has not opened any sort of investigation into their marketing practices. You will also see many For Profit Education stocks (APOL, CPLA, ESI and STRA). They clearly scraped along bottom and have finally rebounded some. So even stocks that get investigated by SEC etc can go down TOO far and become a bargain at some point.
Today's Top 50
When you look at the top 50 today, are their industry groupings in there that could be subject to all being highly correlated? As I peruse this list, it looks pretty diverse. There are three or four education stocks, there are three or four defense contractor stocks. There are three tobacco stocks. A couple firearm manufacturers. Maybe three MLM firms. So I guess some potential potholes, but I think as long as the investor does not overload in anyone of these areas, you should be ok. And the index itself seems diverse enough that one of these sectors getting hit hard would not crush the index.
| Company | Ticker | Market Cap |
| Activision Blizzard Inc | 11,875 | |
| Altria Group Inc | MO | 74,551 |
| Apollo Education Group Inc | 2,991 | |
| Apple Inc | 467,411 | |
| Argan Inc | AGX | 314 |
| Booz Allen Hamilton Holding Corp | BAH | 2,550 |
| Buckle Inc. (The) | 2,516 | |
| CA Inc | CA | 14,809 |
| CACI International Inc. | CACI | 1,678 |
| Chemed Corp | CHE | 1,359 |
| Cirrus Logic Inc. | 1,231 | |
| Cisco Systems Inc | 115,412 | |
| Coach Inc. | 15,205 | |
| Cornerstone Therapeutics Inc | CRTX | 252 |
| Deluxe Corp | 2,466 | |
| Dice Holdings Inc | DHX | 408 |
| Ebix Inc | 530 | |
| Engility Holdings Inc | EGL | 549 |
| GameStop Corp. | 5,747 | |
| Gentiva Health Services Inc | 399 | |
| Great Northern Iron Ore Properties | 110 | |
| Herbalife Ltd | HLF | 7,258 |
| Hewlett-Packard Co | 48,979 | |
| Inteliquent Inc | IQNT | 398 |
| ITT Educational Services Inc | 910 | |
| Lender Processing Services Inc | LPS | 2,949 |
| Liquidity Services Inc | LQDT | 694 |
| Lorillard Inc | LO | 19,395 |
| ManTech International Corp | 1,067 | |
| Mesabi Trust | 303 | |
| Microsoft Corp | 313,559 | |
| Myriad Genetics Inc | 2,477 | |
| Nature's Sunshine Products Inc | 306 | |
| Northrop Grumman Corp | 25,065 | |
| PDL BioPharma Inc | 1,590 | |
| Performant Financial Corp | PFMT | 510 |
| PetMed Express Inc | PETS | 310 |
| Questcor Pharmaceuticals Inc. | QCOR | 3,593 |
| Raytheon Co. | 27,909 | |
| RPX Corp | RPXC | 910 |
| Smith & Wesson Holding Corp | SWHC | 754 |
| Strayer Education Inc | 416 | |
| Sturm Ruger & Co Inc. | 1,487 | |
| Unisys Corp | 1,180 | |
| United Online Inc | 218 | |
| USA Mobility Inc | USMO | 320 |
| USANA Health Sciences Inc | 1,015 | |
| Valassis Communications Inc. | 1,135 | |
| Vector Group Ltd | 1,542 | |
| Weight Watchers International Inc. | 1,829 |
Posts
5 comments:
Marshall, I think I understand reasonably well your criteria for the MFI selections, and your keeping track of lots of 'portfolios'. As I have been building my MFI portfolio I have also been using as a criteria whether or not a stock has a reasonable dividend. I know this isn't a MFI criteria, but feel more comfortable that way. I wonder if you have ever backtested such a strategy. Thanks, Karl
Karl
I have shown that stocks with dividends 2.6% or better have done much better than average since 2006. I do not have te tools to back test it further back than that.
Thanks! I had that suspicion and have been building my real MFI using 2+% and 500 mill$ as the basic criteria. I have been building up the portfolio at about 1 buy per week. That builds, I think, sort of a rolling tranche where in a few months it will be time for a few stocks to start coming out as others go in. Would you have any thoughts on that strategy? At your convenience of course. Karl N
Karl - everyone has an approach that works best for them. I have found that four buys of 5 stocks each time works well for me. I tried the one stock every two weeks at one point, but found myself treating the stocks too individually and not as a portfolio and I would get too emotional when something bad happened to a specific stock. I started trading too much and not being disciplined.
Once again I appreciate your input and guidance. One of my weak points (of which I am sure I have many) is trading too much. Once a stock shows a profit I tend to sell, often too early, and tend to hang on to losers. Maybe this methodology will limit that weakness. :)
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