MFI – Rule 1 Big Five Combo Screen

The Magic Formula Investing (MFI) website screen produces a list of stocks that have a combination of high earnings yield and high returns on capital. However, I’ve noticed that many of the stocks ranked by the MFI screen do not seem to have wide moats (i.e., sustainable competitive advantages). Ideally, I’d love to have a list of stocks that included only great sustainably profitable companies selling at great prices.

Phil Town recently commented on The Little Book That Beats the Market and his comments sparked an idea in my head. What if you could combine the MFI list with Phil’s Big Five Numbers from the Rule #1 Book that he uses to test whether companies have wide moats? Well, I decided to do just that.

Using Portfolio123, I screened for companies that for the past five years scored better than 10 percent for each of the Big 5 Numbers. Ideally, I would use 10 year averages, but most screening tools only have 5 years of data. Therefore, I used the following rules:

  1. ROI%5YAvg > 10
  2. BV5YCGr% > 10
  3. EPS5YCGr% > 10
  4. Sales5YCGr% > 10
  5. (((FCFPSA-FCFPSPY)/ FCFPSPY)+((FCFPSPY-FCFPSPY2)/FCFPSPY2)+((FCFPSPY2-FCFPSPY3)/FCFPSPY3)+((FCFPSPY3-FCFPSPY4)/FCFPSPY4))/4 > 0.1

These five rules produced a list of 165 stocks that I downloaded as an Excel file. I then got the top 100 stocks with a minimum market capitalization of $50 million from Magic Formula Investing. Using Excel, I combined the two lists and using the PivotTable function and then I filtered out a list of stock symbols that appeared two times.

The result was a short list of nine stocks on May 30, 2006. Those stocks are:

  • American Eagle Outfitters Inc. (AEOS)
  • bebe stores Inc (BEBE)
  • Deckers Outdoor Corp (DECK)
  • Harvest Natural Resources Inc. (HNR)
  • Block (H&R) Inc. (HRB)
  • K-Swiss Inc (KSWS)
  • Nucor Corp (NUE)
  • Patterson-UTI Energy Inc (PTEN)
  • USANA Health Sciences Inc (USNA)

I’ll be focusing my research efforts over the next few weeks on this list. With the market providing us with a potential Summer Sale, I might even find some long-term buying opportunities. Please share your thoughts below on this technique and the list of resulting stocks.

19 thoughts on “MFI – Rule 1 Big Five Combo Screen

  • Pingback: Anonymous

  • May 31, 2006 at 5:46 pm
    Permalink

    George,

    Great work! A friend of mine had mentioned this over beers this past weekend, but having not read Rule#1 I didn’t give it a second thought. Well, I just came across your article so I hopped over to Phil Town’s site and I’m excited to read his book. I think you might have found a very effective way to futher screen MFI picks! I’m not sure about the “Tools” mentioned on Phil Town site as indicators as to when to buy and sell, but there rest seems to be well steeped in value investing philosophy!

    Any way, great site and great article I’m going to link to it from my blog.

    Nick

  • Pingback: » Carnival of Investing #25 » Consumerism Commentary: A Blog About Personal Finance

  • Pingback: buffetteer.com » K-Swiss Review

  • July 7, 2006 at 1:44 pm
    Permalink

    I like the idea as well…i was plugging numbers in last night found it pretty difficult to find companies listed on the MagFormula site to mesh well with Rule #1 companies.

    Quick question: what is #5???: # (((FCFPSA-FCFPSPY)/ FCFPSPY)+((FCFPSPY-FCFPSPY2)/FCFPSPY2)+((FCFPSPY2-FCFPSPY3)/FCFPSPY3)+((FCFPSPY3-FCFPSPY4)/FCFPSPY4))/4 > 0.1

  • July 7, 2006 at 5:29 pm
    Permalink

    Number 5 is the annual percent gain in free cash flow from the previous year averaged over five years. I decided to build the average for each year in order to minimize any impacts of a spike in the first or last year in free cash flow for the five year period.

    After playing around with this a bit, I think 5 years is not enough data to look at the free cash flow growth rate. One major capital upgrade can really screw up a five year average. If I had easy access to 10 years of FCF I might be more comfortable with this statistic.

  • August 6, 2006 at 8:56 pm
    Permalink

    Interesting screening ideas. As for #5: Finance Google offers 6 years of data.

  • August 7, 2006 at 7:45 am
    Permalink

    For what its worth, based on 31/5 closing prices your portfolio has gone up 6.63% (6.94% incl dividends). The S&P 900 only went up 0.41%. Looks like a good start to me. Only bad performer is Patterson (-10.8% incl dividend)

  • Pingback: Another method to find Rule 1 Stocks at Rule 1 Numbers

  • Pingback: Potential Large Cap Wide Moat Companies - Rule #1 Big Five - Fat Pitch Financials

  • December 17, 2006 at 6:09 pm
    Permalink

    As an economic researcher and investment analyst myself I think the combination of Greenblatt an Town has produced a very interesting list. I have not calculated the exact results of the stocks selected, but I am quite sure these have produced quite an out performance!

    I think it would also be useful to have a strategy on commodity stocks (like oil producers). Personally I think one could not expect high returns on capitals for these type of companies, over long time frames.

    Besides of this here are many simple ‘tricks’ to improve the system a lot. I have written some reports on this (for free) on http://www.magicformulastocks.com. These ‘tricks’ have to do with the buying/selling-strategy, time frames, how to select the most promising stocks, how to identify durable competitive advantages, etc.

    Success in investing,
    Hendrik Oude Nijhuis
    http://www.magicformulastocks.com

  • Pingback: Top 10 Fat Pitch Financials Posts of 2006 - Fat Pitch Financials

  • April 18, 2007 at 7:39 pm
    Permalink

    Hi, if anyone is interested I found a list of Rule #1 qualified stocls for sale on Ebay for $25! I was skeptical but actually reviewed the list against my own MOS calculations, found several on the list (of 51 stocks in total) that had a good moat, were currently priced at MOS or below and that allowed me to invest right away.

    I felt it was a bargain that let me start putting Rule #1 to work right away but will let you be the judge. Here’s the link for anyone interested:

    http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&ih=020&sspagename=STRK%3AMESE%3AIT&viewitem=&item=300102742304&rd=1&rd=1

  • October 15, 2007 at 2:20 pm
    Permalink

    Hey man – not sure about your calcs. I think that PTEN and USNA have some possibility, but some of your others seem to fail Rule 1 numbers (at least by my calculations). My calcs have HRB at about 600% MOS – that’s not a good safety net.

    My Rule 1 screen is also done in excel – I get most of my info from MSN Money (10 years backdata on most fields).

    I see that this blog post is pretty old, so maybe you did the calcs on data that isn’t up to date as of Oct 2007.

  • January 21, 2008 at 12:54 pm
    Permalink

    If you are a member of Fidelity – you can perform an advanced search with 5 YR Historical on all of Phil’s “Big 5” that will give you all the information you need. Investools.com also has a special view within its website that provides the Rule #1 businesses. Fidelity is your cheapest option – Investools is the most expensive.

  • January 16, 2011 at 10:00 pm
    Permalink

    What screening conditions would you use with Fidelity’s web site to get the “Big 5”? I would like to try it.

  • April 25, 2011 at 3:18 am
    Permalink

    After 5 years- how has this performed?

  • February 22, 2012 at 5:01 pm
    Permalink

    Marlin,

    The portfolio would have gotten killed, but for DECK, which went from about $12 to a peak of $118. Every other stock has lost more than the market, most have lost a lot more… YOu would have gotten killed using that screen and holding those stocks waiting for them to hit a “sticker price.” Killed.

    It might actually be a good screen to short the stocks…

Leave a Reply

Your email address will not be published. Required fields are marked *