Monthly MFI Tracking Portfolio 11/24/17

Monthly MFI Tracking Portfolio 11/24/17

Another month/year has flown by. And so it is time to look at another monthly tracking portfolio as we hit the end of November 2018.  The picture to the left is sadly a memory of the great fall we had this year.  We now have snow.

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.

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).  Greenblatt wrote a great analysis of growth vs value lately (Market Observations – September 2018 ).

Onward

 Fearless readers will recall we had a 29 month "losing streak"..  Then we had a 13 month winning streak. Now we have our fourth straight win (after a 10 month losing streak), winning handily 9.8% to 7.0% this month. It feels always good to win one.  MFI does tend to be streaky.

Guess what?  The December portfolio is leading as well.  But then the next 10 portfolios are trailing... again.  In fact, of the 10 newest open portfolios, they are down an average of 4.2%, with only one in the green.  The 10 R3K tranches are flat overall. So we're trailing by 4.2 points in the past ten tracking portfolios.  I mention this as it tracks my real life.  Of my 7 most recent MFI tranches, I am down an average of 3.3% and r3K is up 0.9%. So the same 4.2% deficit.

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
DIN	41.12	89.18	116.9%	774
BIVV	50.57	105.00	107.6%	5,471
DISCA	17.50	30.72	75.5%	9,993
ESRX	61.18	101.47	65.9%	34,652
SYNT	25.18	41.00	62.8%	2,086
MSGN	17.50	26.78	53.0%	1,317
HSII	24.04	36.66	52.5%	458
BPT	16.58	25.20	52.0%	429
MEET	2.69	4.03	49.8%	193
FFIV	123.19	171.97	39.6%	7,711
INVA	13.26	18.26	37.7%	1,432
CSCO	35.41	47.87	35.2%	179,969
IPG	17.91	23.50	31.2%	7,278
AMAG	14.20	18.05	27.1%	502
MSB	21.22	26.66	25.7%	308
NHTC	17.60	21.38	21.4%	205
VIAB	25.60	30.86	20.6%	10,579
AMCX	49.89	59.86	20.0%	3,129
TVTY	35.10	40.96	16.7%	1,388
OMC	66.74	76.97	15.3%	15,900
MCFT	22.47	25.91	15.3%	420
ABC	79.85	88.90	11.3%	18,232
HPQ	20.74	23.00	10.9%	34,961
HRB	24.48	27.01	10.3%	5,364
JILL	5.60	6.17	10.2%	245
TGNA	12.71	13.29	4.6%	2,800
PCO	663.75	690.00	4.0%	166
IDCC	73.11	75.26	2.9%	2,582
GILD	70.34	71.94	2.3%	94,705
NLS	13.15	12.91	-1.8%	404
KLAC	102.23	98.56	-3.6%	16,461
UTHR	125.01	118.10	-5.5%	5,721
LEE	2.40	2.24	-6.7%	136
PBI	9.11	8.44	-7.4%	1,853
MIK	18.54	16.97	-8.5%	3,401
EGRX	57.06	50.40	-11.7%	911
AVID	7.38	6.44	-12.7%	304
GME	15.87	13.66	-13.9%	1,768
TRNC	17.30	14.59	-15.7%	580
EGOV	15.92	13.00	-18.3%	1,077
SP	38.70	30.31	-21.7%	859
DLX	67.22	50.35	-25.1%	3,299
VEC	32.50	24.23	-25.4%	360
AGX	58.32	43.47	-25.5%	929
MPAA	24.45	17.95	-26.6%	484
MNKD	3.00	1.78	-40.7%	314
SQBG	1.72	0.96	-44.2%	109
EVC	6.21	3.23	-48.0%	583
CJREF	7.69	3.73	-51.5%	1,877
ICON	1.79	0.15	-91.6%	102

So 5 stinker stocks dropping 30% or more (typically tends to be 7 to 8).  And two stocks topping doubles, BIVV and DIN.  Then here is listing of every tracking portfolio back to 2006:

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%	22.9%	0
2/24/2017	7.6%	17.4%	0
3/31/2017	6.4%	13.6%	0
4/28/2017	5.8%	13.8%	0
5/26/2017	11.1%	15.1%	0
6/29/2017	11.1%	14.7%	0
7/28/2017	12.5%	16.1%	0
8/25/2017	28.8%	21.5%	1
9/29/2017	20.0%	17.3%	1
10/27/2017	11.8%	4.0%	1
11/24/2017	9.8%	7.0%	1
12/29/2017	8.9%	4.1%	1
1/26/2018	-3.7%	-2.7%	0
2/23/2018	-2.4%	1.4%	0
3/29/2018	-0.2%	4.9%	0
4/27/2018	-4.8%	3.7%	0
5/25/2018	-6.6%	1.3%	0
6/29/2018	-6.4%	1.0%	0
7/27/2018	-5.7%	-2.2%	0
8/31/2018	-7.8%	-5.5%	0
9/28/2018	-7.3%	-5.6%	0
10/26/2018	2.8%	4.0%	0

So here you can see very clearly how the past 10 tracking portfolios are struggling.  As my daughter tells me, "the struggle is real".  So while I beat myself up over my actual results in October and November this year, you can see it is across the board.

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 despite CJREF and GME bringing the group down.. My dividend MFI portfolio (which are stocks I track with a yield of 2.6% or greater) was up 19.7%.

Here are the divvy stocks from a year ago:

Stock	Initial Price	End Price	Percent Change
DIN	41.12	89.18	116.9%
BPT	16.58	25.20	52.0%
CSCO	35.41	47.87	35.2%
IPG	17.91	23.50	31.2%
MSB	21.22	26.66	25.7%
VIAB	25.60	30.86	20.6%
OMC	66.74	76.97	15.3%
HRB	24.48	27.01	10.3%
GILD	70.34	71.94	2.3%
PBI	9.11	8.44	-7.4%
GME	15.87	13.66	-13.9%
CJREF	7.69	3.73	-51.5%

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	220,276
Total Russell 3K	271,397
Dividend	543,928