MFI Monthly Tracking Portfolio - 3/31/2017

MFI Monthly Tracking Portfolio - 3/31/2017

Another month/year has flown by. And so it is time to look at another monthly tracking portfolio as we hit the end of March 2018.  As my faithful readers know, I have been tracking the Magic Formula Stocks as described by Joel Greenblatt in The Little Book That Beats the Stock Market since January 2006.  Every month I take the top 50 stocks over $100m market cap from his website and track how that portfolio of stocks fares versus the Russell 3000 for the next 12 months.  It has been an uphill struggle as the tracking portfolios have under-performed, driven in part by Chinese reverse merger fiascos, for-profit education stocks and home health care stocks all being proverbial albatrosses.

I also encourage new readers to read

Guide To New Readers

(you can also find this in Archives of October 2017)

People ask, does MFI not work anymore?  I am not sure. Perhaps 12 years isn't long enough. Perhaps it works better at a higher market cap cut off (I believe this to be true).  I think too many stocks make the screen over the years by "mistake"... that is they are not true value/cheap stocks. In 2011, we had a bunch of Chinese Reverse Merger stocks that hurt that year and were out and out frauds.  Then we have also had a number of stocks that have a one time spike in earnings that fools the formula.  Frankly, it might do better if instead of a trailing 12 month income look, it used a trailing 24 month look on income, to filter out the one time spikes.

But even with that being said, Value stocks have not exactly been in favor the past couple of years, although this appears to be changing (although painstakingly slowly).

Onward

 Fearless readers will recall we had a 29 month "losing streak"..  Then we had a 13 month winning streak. Now we have a 6 month losing streak, getting whooped 18.7% to 9.2%. U G L Y.

The past three month/years (February, January and December) have been the worst 3 month relative losers to the benchmark of my 130+ month/years.  Not time for woo-hoo!

Guess what?  We are still struggling.  The 50 stocks on the screen got beaten by 7.2 percentage points (13.6% to 6.4%).  At least that is better than 9.8 point shellacking posted last month. It has been rugged.  Greenblatt warned there would be times people would want to quit and this would ensure in working down the road.

And 5 of the 11 open portfolios are trailing, by about 1.2  points on average,  So you can see why I am excited that both my real money MFI portfolios are beating benchmark.  That is actually an accomplishment in today's market that loves growth and disruptors.

Here are the 50 stocks in descending performance order (from the portfolio that just hit a year):

Stock	Initial Price	End Price	Percent Change	Mkt Cap
RCM	3.09	7.14	131.1%	330
VEC	22.35	37.24	66.6%	240
SCMP	11.00	18.00	63.6%	477
KORS	38.11	62.08	62.9%	6,346
MCFT	16.17	25.20	55.8%	301
BBSI	53.74	82.88	54.2%	396
MNKD	1.48	2.28	54.1%	142
SYNT	16.83	25.53	51.7%	1,408
USNA	57.60	85.90	49.1%	1,410
MBUU	22.45	33.21	47.9%	400
BPT	17.06	23.90	40.1%	430
TVTY	29.10	39.65	36.3%	1,133
CSCO	32.67	42.89	31.3%	169,237
PDLI	2.27	2.94	29.5%	376
TDC	31.12	39.67	27.5%	4,064
BKE	17.59	22.15	25.9%	904
HPQ	17.41	21.92	25.9%	30,278
CSGS	37.11	45.29	22.1%	1,220
TRNC	13.92	16.42	18.0%	507
GILD	66.04	75.39	14.2%	88,839
CA	30.75	33.90	10.2%	13,109
ESRX	65.91	69.08	4.8%	40,759
DLX	70.92	74.01	4.4%	3,504
GHC	594.29	602.25	1.3%	3,365
NSR	33.15	33.50	1.1%	1,820
BIIB	273.42	273.82	0.1%	59,059
RGR	52.43	52.50	0.1%	1,001
PCO	639.16	634.50	-0.7%	174
AVID	4.66	4.54	-2.6%	189
MSGN	23.35	22.60	-3.2%	1,753
AMAG	22.55	20.15	-10.6%	774
PBI	12.33	10.89	-11.6%	2,434
AMCX	58.68	51.70	-11.9%	4,023
MIK	22.39	19.71	-12.0%	4,328
OMC	83.63	72.67	-13.1%	20,233
IDCC	84.90	73.60	-13.3%	2,960
UTHR	135.38	112.36	-17.0%	6,164
TGNA	25.62	20.83	-18.7%	5,495
UIS	13.95	10.75	-22.9%	699
TZOO	9.65	7.28	-24.6%	133
NLS	18.25	13.45	-26.3%	563
MPAA	30.73	21.43	-30.3%	608
NHTC	28.23	19.01	-32.7%	326
AGX	65.17	42.95	-34.1%	1,011
GME	20.81	12.62	-39.3%	2,265
AGTC	6.90	3.85	-44.2%	125
SQBG	3.89	2.09	-46.3%	243
AOBC	19.81	10.32	-47.9%	1,116
DHX	3.95	1.60	-59.5%	196
ICON	7.52	1.11	-85.2%	429

This table is SO MFI.  Look at the spread of results.  Nine of the 50 names are -30% or worse.  And four are +60% or better.  Just for illustration,  I will pick 5 random portfolios of 5 stocks to show the variability using a random number generator.  Keep in mind that the average of the 50 names is 6.4%.

Random #	Stock	Gain/Loss
5	AGX	-34.1%
49	USNA	49.1%
4	AGTC	-44.2%
38	SQBG	-46.3%
46	TRNC	18.0%
Average		-11.5%

Random #	Stock	Gain/Loss
43	TDC	27.5%
22	IDCC	-13.3%
45	TZOO	-24.6%
15	DHX	-59.5%
24	MNKD	54.1%
Average		-3.2%

Random #	Stock	Gain/Loss
47	UIS	-22.9%
31	NLS	-26.3%
48	UTHR	-17.0%
46	TRNC	18.0%
40	SCMP	63.6%
Average		3.1%

Random #	Stock	Gain/Loss
3	AOBC	-47.9%
14	DLX	4.4%
25	MCFT	55.8%
17	GME	-39.3%
46	TRNC	18.0%
Average		-1.8%

Random #	Stock	Gain/Loss
20	HPQ	25.9%
50	VEC	66.6%
27	MIK	-12.0%
15	DHX	-59.5%
24	MNKD	54.1%
Average		15.0%

I promise I did not "fix" anything.  Totally random here.  But you can see individual portfolios of 5 stocks vary greatly around the overall average of 6.4%.

Here is a listing of every portfolio I have tracked:

Date	MFI	R3K	Lead
1/6/2006	16.0%	10.9%	1
2/17/2006	21.2%	14.6%	1
3/29/2006	13.0%	9.6%	1
4/7/2006	10.3%	12.1%	0
5/12/2006	20.4%	18.6%	1
5/31/2006	29.2%	23.3%	1
6/30/2006	22.4%	20.0%	1
7/31/2006	19.7%	17.3%	1
8/31/2006	13.0%	13.3%	0
9/28/2006	12.7%	14.6%	0
10/27/2006	10.3%	12.0%	0
11/29/2006	-0.3%	4.8%	0
12/28/2006	-6.9%	3.4%	0
1/26/2007	-10.2%	-6.6%	0
2/27/2007	-3.7%	-1.0%	0
3/26/2007	-9.8%	-5.5%	0
4/27/2007	-10.9%	-5.0%	0
5/29/2007	-11.5%	-6.3%	0
7/3/2007	-30.0%	-15.6%	0
7/30/2007	-19.9%	-11.5%	0
8/30/2007	-12.5%	-8.7%	0
9/27/2007	-19.0%	-18.2%	0
11/2/2007	-40.4%	-34.3%	0
11/28/2007	-40.1%	-38.3%	0
12/28/2007	-36.3%	-40.0%	1
1/25/2008	-36.4%	-35.9%	0
2/26/2008	-51.7%	-41.5%	0
3/24/2008	-40.9%	-36.8%	0
4/25/2008	-25.6%	-31.0%	1
5/28/2008	-22.2%	-33.6%	1
7/2/2008	-11.7%	-25.3%	1
7/29/2008	-10.5%	-20.9%	1
8/29/2008	-13.8%	-17.9%	1
9/26/2008	-4.3%	-10.0%	1
10/31/2008	18.7%	13.9%	1
11/26/2008	50.9%	27.7%	1
12/26/2008	48.9%	32.3%	1
1/23/2009	59.3%	36.4%	1
2/27/2009	92.8%	55.6%	1
3/27/2009	85.8%	48.1%	1
4/24/2009	69.7%	45.8%	1
5/29/2009	31.8%	22.8%	1
6/29/2009	21.3%	24.0%	0
7/29/2009	19.5%	15.9%	1
8/28/2009	7.4%	8.8%	0
9/25/2009	12.6%	12.4%	1
10/30/2009	22.7%	18.3%	1
11/27/2009	24.3%	13.6%	1
12/31/2009	23.7%	18.1%	1
1/22/2010	19.0%	20.6%	0
2/26/2010	18.6%	23.6%	0
3/25/2010	10.0%	15.4%	0
4/23/2010	7.1%	11.4%	0
5/28/2010	19.3%	25.4%	0
6/29/2010	16.7%	25.7%	0
7/29/2010	5.4%	20.1%	0
9/2/2010	7.3%	10.1%	0
9/24/2010	-4.3%	0.3%	0
10/29/2010	-2.9%	10.4%	0
11/26/2010	-8.5%	1.4%	0
1/3/2011	-11.4%	0.1%	0
1/28/2011	-7.6%	4.9%	0
2/25/2011	-5.5%	5.0%	0
3/24/2011	-4.4%	7.4%	0
4/21/2011	-16.0%	3.2%	0
5/27/2011	-12.0%	-0.4%	0
6/24/2011	-9.5%	5.0%	0
7/29/2011	-4.3%	8.1%	0
8/26/2011	12.0%	21.6%	0
9/30/2011	23.5%	29.6%	0
10/28/2011	0.4%	11.5%	0
11/25/2011	13.9%	24.0%	0
12/29/2011	9.9%	15.9%	0
1/27/2012	7.4%	16.6%	0
2/24/2012	7.8%	13.3%	0
3/23/2012	9.1%	15.2%	0
4/27/2012	10.5%	15.3%	0
5/25/2012	23.4%	27.5%	0
6/22/2012	26.1%	24.6%	1
7/27/2012	30.4%	25.7%	1
8/24/2012	26.0%	19.8%	1
9/28/2012	39.3%	22.1%	1
10/26/2012	48.3%	28.9%	1
11/23/2012	45.7%	32.1%	1
12/31/2012	52.3%	33.0%	1
1/25/2013	39.5%	22.0%	1
2/22/2013	46.5%	26.4%	1
3/28/2013	40.1%	21.2%	1
4/26/2013	35.0%	20.5%	1
5/24/2013	20.4%	19.2%	1
6/28/2013	26.9%	24.1%	1
7/29/2013	17.8%	19.0%	0
8/30/2013	17.5%	24.6%	0
9/27/2013	12.9%	17.7%	0
10/25/2013	11.8%	15.4%	0
11/29/2013	12.3%	15.6%	0
12/31/2013	12.7%	11.9%	1
1/31/2014	14.2%	13.0%	1
2/28/2014	15.4%	13.9%	1
3/28/2014	6.1%	12.3%	0
4/25/2014	8.6%	15.8%	0
5/30/2014	5.9%	11.7%	0
6/27/2014	2.5%	9.2%	0
7/25/2014	3.3%	8.7%	0
8/29/2014	-2.2%	1.0%	0
9/26/2014	-0.6%	-0.9%	1
10/31/2014	4.3%	4.4%	0
11/28/2014	-2.9%	2.9%	0
12/31/2014	-9.3%	0.3%	0
1/30/2015	-12.4%	-2.8%	0
2/27/2015	-19.0%	-7.3%	0
3/27/2015	-17.1%	-1.9%	0
4/24/2015	-15.4%	-0.8%	0
5/29/2015	-14.1%	0.1%	0
6/26/2015	-8.7%	0.4%	0
7/30/2015	3.96%	4.02%	0
8/28/2015	5.6%	10.2%	0
9/25/2015	6.5%	13.8%	0
10/30/2015	2.0%	4.0%	0
11/27/2015	8.9%	8.4%	1
12/31/2015	13.7%	12.6%	1
1/29/2016	22.6%	22.4%	1
2/26/2016	27.8%	25.4%	1
3/24/2016	26.5%	19.6%	1
4/22/2016	13.7%	14.8%	0
5/27/2016	14.3%	15.6%	0
6/30/2016	23.2%	16.1%	1
7/29/2016	17.1%	16.0%	1
8/26/2016	10.6%	14.6%	0
9/30/2016	18.6%	18.5%	1
10/28/2016	18.3%	24.1%	0
11/25/2016	7.4%	19.2%	0
12/30/2016	4.7%	20.5%	0
1/27/2017	10.5%	17.2%	0
2/24/2017	7.6%	17.4%	0
3/31/2017	6.4%	13.6%	0
4/28/2017	1.9%	12.5%	0
5/26/2017	4.8%	11.1%	0
6/29/2017	2.3%	10.5%	0
7/28/2017	2.6%	8.3%	0
8/25/2017	12.2%	9.6%	1
9/29/2017	2.8%	5.6%	0
10/27/2017	5.7%	3.1%	1
11/24/2017	4.2%	2.0%	1
12/29/2017	6.9%	-0.8%	1
1/26/2018	-3.3%	-7.2%	1
2/23/2018	-2.2%	-3.3%	1

You can see 4/28/17 is also looking terrible with a month to run.  

Dividend Subset

My backtracking has shown that MFI stocks that pay a dividend seem to do better. I believe this is because a dividends infers that income flows are more likely to be sustainable.  This tends to extract stocks with large one time payments.  That was true again this month-year. My dividend MFI portfolio (which are stocks I track with a yield of 2.6% or greater) were up 16.6%.  MUCH better than the 7.6% for all fifty MFI stocks I tracked.

Finally, I like to track cash as it is more "honest" than percentages as if you go up by 25% and then down by 25%, that is a different result than up by 5% then down by 5%.  So I track what you would have today if you had spread $100,000 over the first twelve portfolios evenly. I think it is obvious why my formula approach is a function of dividend subset.

Category	Value
Total	214,412
Total Russell 3K	257,749
Dividend	491,230