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:
- ROI%5YAvg > 10
- BV5YCGr% > 10
- EPS5YCGr% > 10
- Sales5YCGr% > 10
- (((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.