MFI Monthly Tracking Portfolio 12/31/17

MFI Monthly Tracking Portfolio 12/31/17

Another month/year has flown by. And so it is time to look at another monthly tracking portfolio as we hit the end of  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.

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 ).  Although his writing doesn't seem to be bearing fruit yet.

Onward

 Fearless readers will recall we had a 29 month "losing streak"..  Then we had a 13 month winning streak. Now we have our fifth straight win (after a 10 month losing streak), "winning"  -3.4% to -5.4% this month. It feels always good to win one.  MFI does tend to be streaky.

Guess what?   All 11 open portfolios are trailing.  They are down on average by a dismal 14.6%.  The 11 R3K tranches are down 9.1% on average. So we're trailing by 5.5 points in the past 11 tracking portfolios.  I mention this as it tracks my real life.  Of my 7 most recent MFI tranches, I am down an average of 15.3% and r3K is down 8%. So a 7% 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
ABCD	5.68	14.48	154.9%	265
BIVV	53.92	105.00	94.7%	5,833
SYNT	22.99	41.00	78.3%	1,905
MEET	2.82	4.63	64.2%	202
DIN	49.06	67.34	37.3%	913
CPLA	76.64	104.00	35.7%	901
BPT	16.62	21.64	30.2%	430
HSII	24.19	31.19	29.0%	461
NHTC	14.63	18.49	26.4%	172
ESRX	74.64	92.33	23.7%	42,276
INVA	14.19	17.45	23.0%	1,533
PCOA	575.00	690.00	20.0%	142
MSGN	20.25	23.56	16.3%	1,524
AMAG	13.25	15.19	14.6%	469
DISCA	22.38	24.74	10.5%	12,779
IPG	19.45	20.63	6.1%	7,834
PDLI	2.74	2.90	5.8%	423
OMC	70.47	73.24	3.9%	16,790
AMCX	54.08	54.88	1.5%	3,392
HRB	25.25	25.37	0.5%	5,482
HPQ	20.50	20.46	-0.2%	34,582
GILD	69.44	62.55	-9.9%	93,633
LEE	2.35	2.11	-10.2%	133
IDCC	74.83	66.43	-11.2%	2,643
KLAC	102.26	89.49	-12.5%	16,465
AGX	43.88	37.84	-13.8%	700
VIAB	29.99	25.70	-14.3%	12,398
MCFT	22.22	18.70	-15.8%	415
PTN	0.86	0.71	-17.4%	158
ABC	90.26	74.40	-17.6%	20,016
NLS	13.35	10.90	-18.4%	410
SP	37.10	29.54	-20.4%	824
TGNA	13.75	10.87	-21.0%	3,030
GME	16.22	12.62	-22.2%	1,818
EGOV	16.24	12.48	-23.2%	1,101
EGRX	53.42	40.29	-24.6%	853
CASA	17.76	13.13	-26.1%	599
UTHR	147.95	108.90	-26.4%	6,771
VEC	30.85	21.58	-30.0%	342
TVTY	36.55	24.81	-32.1%	1,446
MPAA	24.99	16.64	-33.4%	495
TRNC	17.59	11.34	-35.5%	590
SRNE	3.80	2.40	-36.8%	298
PBI	10.29	5.91	-42.6%	2,086
DLX	75.35	38.44	-49.0%	3,698
CNCE	25.87	12.55	-51.5%	635
SQBG	1.78	0.80	-55.1%	112
CJREF	7.83	3.50	-55.3%	1,900
EVC	6.81	2.91	-57.3%	647
OPHT	3.12	1.20	-61.5%	112

Pretty wide variance. Standard Deviation almost 41%.  That seems insane. Then hear is a 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%	11.7%	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	-3.4%	-5.4%	1
1/26/2018	-15.0%	-11.6%	0
2/23/2018	-11.7%	-7.9%	0
3/29/2018	-9.6%	-4.7%	0
4/27/2018	-15.2%	-5.8%	0
5/25/2018	-16.7%	-8.0%	0
6/29/2018	-17.0%	-8.2%	0
7/27/2018	-16.7%	-11.2%	0
8/31/2018	-18.9%	-14.1%	0
9/28/2018	-18.4%	-14.3%	0
10/26/2018	-10.2%	-5.5%	0
11/30/2018	-11.7%	-9.2%	0

You can see the underperformance from 1/26/18 forward.

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 not true  this month-year due to CJREF and PBI bringing the group down.. My dividend MFI portfolio (which are stocks I track with a yield of 2.6% or greater) was down 6.6%.

Here are the divvy stocks from a year ago:

Stock	Initial Price	End Price	Percent Change
DIN	49.06	67.34	37.3%
BPT	16.62	21.64	30.2%
IPG	19.45	20.63	6.1%
OMC	70.47	73.24	3.9%
HRB	25.25	25.37	0.5%
GILD	69.44	62.55	-9.9%
VIAB	29.99	25.70	-14.3%
GME	16.22	12.62	-22.2%
PBI	10.29	5.91	-42.6%
CJREF	7.83	3.50	-55.3%

down 6% overall, but two just terrible names in PBI and CJREF. I was very fortunate the random number generator didn't give me them in my MFI Formula tranche a year ago.

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	195,402
Total Russell 3K	244,682
Dividend	477,940