Familar Names on the Magic Formula List

I’m always a little skeptical of any stock market screen called a “magic formula,” but I do like to consult Joel Greenblatt’s screener by that name from time to time.

Greenblatt, who made the screen famous in his book The Little Book that Beats the Market ranks stocks using two criteria:

  1. Valuation, as measured by the earnings yield (defined by Greenblatt as EBIT / Enterprise Value)
  2. Profitability, as measured by Greenblatt’s preferred metric, Return on Capital

There is really nothing “magical” about it.  It’s simply a screen that looks for highly-profitable companies trading at cheap prices.  And good analyst can use the list as a starting point for further research.

With that said, I want to highlight a handful of well-known stocks that made the cut on the screen this week:


Ticker Price date Most Recent Financials




Cisco Systems




Coach Inc








Smith & Wesson




As you might expect from any list of stocks on a value screens, all of these companies have “issues.”  We all know that Apple’s growth is slowing and that its product lineup isn’t as innovative as it was under Steve Jobs.  Cisco and Microsoft have had a hard time adjusting to the mobile era.  Coach is struggling from weakness in its core market, “aspirational” middle-class American women.  And Smith & Wesson is facing slower sales in the years ahead, as a lot of would-be buying was forward by fears of new government gun control.

Yet all of these companies are wildly profitably, all have very low debt and very little risk of financial distress, and all but Smith & Wesson pay a respectable and growing dividend.

As you rebalance your portfolio in the final months of 2013, give the Magic Formula stocks a look.  Over any reasonable investment time horizon, “cheap and profitable” is a winning combination.

Sizemore Capital is long CSCO and MSFT. This post first appeared on TraderPlanet.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

The JC Penney Saga: Are Poison Pills Good or Bad for Investors?

For a staid old department store with a 111-year-old history, JC Penney Company (JCP) has been in the news a lot this year, though not for any noteworthy operational developments; the retailer continues its slow march into irrelevance, and it’s not likely to change course any time soon.

The headlines have mostly surrounded one particularly vocal shareholder, Bill Ackman of Pershing Square Capital, who owns about 18% of the company.  Up until recently, Ackman was also on the JC Penney board of directors…until he resigned in a hissy fit after demanding that the company replace its CEO within 45 days.  And this after Ackman’s choice for the job—former Apple (AAPL) executive Ron Johnson—ran the company into the ground.

Ackman likes to think of himself as a “shareholder activist” who shakes up complacent or self-serving company boards and unlocks value for shareholders.  But to his detractors, he is nothing more than a corporate raider—a pirate in a suit that loots and leaves.  JC Penney Chairman Thomas Engibous called him “disruptive and counterproductive.”   And given Ackman’s recent behavior, it’s hard to argue with the chairman.

All of this brings me to Penney’s new “poison pill” provisions.  After the Ackman experience, JC Penney never again wants to become the personal plaything of a hedge fund titan.  For those unfamiliar with the term, a poison pill floods the market with new stock in the event of a hostile takeover.  It makes it impossible—or at least very expensive—for a corporate raider to take over a company without management’s blessing.  The Penney poison pill would kick in whenever an outside shareholder acquired 10% or more of the company’s stock.

And this is where the theater of the absurd starts.  The poison pill is being called a “shareholder rights” plan by management.  So, we have a “shareholder rights” plan being implemented to protect investors from “shareholder activists” like Ackman.  If you’re a Penney shareholder, you must really feel special.  It looks like everyone is looking out for your best interests.

Except that they’re not.  Corporate raiders like Ackman—and some of his high-profile rivals like Carl Icahn and Daniel Loeb—are absolutely correct when they say that corporate managements tend to run companies for their own benefit rather than for the benefit of the shareholders.  In business school they call it the “principal-agent problem,” but we don’t need to get bogged down in fancy terminology.  Unless motivated by altruism or idealism, people tend to look out for number one first.

So if management are the “bad guys,” does that make Ackman & Co. the “good guys.”

If you believe that then you have no business investing.  “Shareholder activists” may inadvertently help smaller shareholders by driving up the stock price after successfully engineering a reorganization of the company.  But they do so for their own benefit, not yours.  This is Wall Street…not charity.

So, now that I have sufficiently jaded your view of humanity, what are we to do with this information?  Should we view poison pills favorably…or should we run away screaming when a company we own implements one?

I would frame it like this: If you’re investing in well-run companies, it generally won’t matter.  Good companies with healthy prospects generally don’t need poison pill provisions.  Yes, Bill Ackman made a mess of JC Penney.  But JC Penney was already a company in terminal decline long before Ackman got his paws on it.  Rather than waste your time and capital on an investment in Penney, you could have invested in a healthier rival like Wal-Mart (WMT) or Target (TGT)—both of which are monster dividend raisers and share repurchasers.

And Wal-Mart is a fine example of the next point I’d like to make.  If your last name is Walton, then your livelihood disproportionately depends on the performance of Wal-Mart.  The same would be true of Michael Dell and Dell Inc. (DELL).  When your name is on the signage, the company’s destiny is your destiny; you can’t simply walk away.  But outside investors—and particularly regular, individual investors—have the luxury of voting with their feet.  If you don’t like the way a company is run, don’t waste your time in a shareholder proxy fight that you can’t realistically influence.  Sell the shares and allocate your funds elsewhere.

Finally, while you should always assume that a large high-profile investor is investing for their own benefit and not yours, it doesn’t mean you can’t tag along for the ride.  I regularly look at the trading moves made by my favorite money managers.  But be careful here and choose your gurus and their picks wisely.  Yes, Carl Icahn is a smart investor, and yes, tracking his trading moves can be insightful.  But I would steer clear of some of his recent high-profile buys like Dell and Herbalife (HLF). Both have become battlegrounds for hedge fund titans, and as an individual investor you have a serious information disadvantage.

Disclosures: Sizemore Capital is long WMT.

Magic Formula Stocks for August

Last month, I ran a screen of “Magic Formula” stocks from hedge fund guru Joel Greenblatt’s screener.

I recommend you read the original piece because I explain what the Magic Formula is and how it works.  But for the sake of simplicity, I can summarize it like this:  the Magic Formula is a list of highly-profitable companies trading at cheap valuations. 

The list isn’t fool-proof, of course, and it is subject to lag times in information.  For example, profitability (based on Greenblatt’s favorite metric, return on capital) is based on the most recent quarterly filings, and a lot can change from quarter to quarter.

So, the Magic Formula screen should be viewed as a great starting point for your investment research and as a great fishing pond for potential value plays.  But you shouldn’t assume that every stock on the list is a bargain.

With that said, I re-ran the screen for August with the same parameters as July: top 30 Magic Formula stocks with a market cap of $1 billion or more.

We have several familiar names that have been on the list off and on for the past several years—Microsoft (MSFT), Cisco (CSCO) and Lorillard (LO), for example.  Dell (DELL), which—as I noted last month—is tied up in a fight for control of the company between founder Michael Dell and a group of sharesholders led by Carl Icahn, also made the cut.

On a list of 30 names, 25 were unchanged from July.  But we did have five subtractions and five new additions:

Off the List:
Abbott Labs


CF Industries Holdings Inc


GameStop Corp


Questcor Pharmaceuticals Inc.


Weight Watchers International Inc


New Additions:
Coach Inc


Express Inc


PDL BioPharma


Sturm Ruger & Co


ValueClick Inc



Of the five stocks bounced from the list from last month, it’s worth noting that all but Abbott Labs (ABT) and Weight Watchers (WTW) still made the cut on the expanded 50-stock list (I encourage you to play with the list here.  Adjusting the portfolio size and minimum market cap can produce almost infinite numbers of portfolios.)

It’s also worth noting the stock price performance over the past month.  Weight Watchers is down by nearly a quarter from its August 2 highs while Questcor Pharmaceuticals (QCOR) is up almost 40% in the past month, and GameStop (GME) is up about 12%.

The new additions for August will have a few familiar names.  Coach (COH) has been off and on the Magic Formula list for years.  Coach is a monstrously profitable company with a return on equity of 47%.  Yet the success of upstart rival Michael Kors (KORS) has dampened enthusiasm for the stock, which is down by over 30% from its old 2012 highs.

Fashion retailer Express (EXPR) also made the cut, as did firearm maker Sturm Ruger (RGR).  With President Obama—perceived by many to be “anti-gun”—now in office for nearly five years and with the tragic Newton school shooting fading from the headlines, the possibility of immediate and comprehensive gun control is receding.  Perversely, this is actually bad for handgun makers, which have enjoyed a windfall from panicked gun owners fearing that their window of opportunity to buy a gun was closing.  Handgun makers like Sturm Ruger should not expect to see the kinds of revenue gains they’ve enjoyed for the past several years.

Still, Sturm Ruger is attractively priced at 11 times earnings and sports a 4.6% dividend yield.

And lastly, online marketing company ValueClick (VCLK) and biotechnology firm PDL BioPharma made the cut in August as well.

Disclosures: Sizemore Capital is long MSFT, CSCO and ABT


Three Smart Money Dividend Picks

With the 10-year Treasury yield hitting new multi-year highs and all dividend-focused stock taking a beating as a result, income investors can be forgiven for feeling a little uneasy at the moment.  It’s unsettling to buy a REIT, MLPs or dividend-paying stock in the hopes of enjoying a nice 4-5% yield only to lose two or three times that much due to price declines.

During times of turbulence, it can be helpful to take a peek over the shoulder of a successful investor you respect to see how they are reacting.  You shouldn’t mindlessly ape what they are doing, of course.  But following their trading moves can give you a sense of perspective.

With that in mind, let’s take a look at three investment gurus to see what dividend-focused investments they are buying—or perhaps not buying.

No guru list is complete without a mention of the Sage of Omaha, so I’ll start with Warren Buffett.  I wrote a short piece last week outlining some of Buffett’s recent purchases, though most of the comments centered around non-dividend paying companies such as Dish Networks (DISH).

Interestingly, none of Buffett’s major new additions are “dividend focused,” per se.  Suncor Energy (SU), one of his larger new holdings, pays a modest 2.3%.

Perhaps his most promising dividend payer is his old standby—Wells Fargo & Company (WFC).  Buffett has owned Wells Fargo for years, and it is currently the largest single holding in his portfolio.  He’s been adding to the position throughout 2013, and he snapped up nearly 5 million shares last quarter.

Wells Fargo may seem an odd choice as a “dividend stock,” given that the company yields only 2.5%.  Like most banks, Wells Fargo slashed its dividend during the crisis to conserve capital. Yet since 2011, Wells Fargo has been aggressively raising its dividend, from a $0.05 per quarter in February of that year to $0.30 per quarter today.  The dividend is now nearly back to pre-crisis levels.

We can’t expect the dividend to rise by a factor of six again over the next two years; those sorts of jumps only happen when you take those first steps out of crisis.  But I do expect the bank to deliver better than average dividend growth for the next several years.

Next on the list is one of my favorite value managers, David Dreman.  If you’re not familiar with Dreman, you should be.  He wrote the book on contrarian investing, and I mean that literally.  His Contrarian Investment Strategies is a classic any serious investor should have in their library.  He’s also a regular contributor to Forbes.

So, what has Mr. Dreman been buying?

One position that caught my eye is Mack-Cali Realty Corp (CLI), a real estate investment trust specializing in office and light industrial properties.

REITs have gotten pounded in the recent “taper” turbulence, and Mack-Cali is no exception.  In the past three months, the stock has lost a quarter of its value.  But as the consummate contrarian, Dreman appears to view the sell-off as an opportunity.

In looking at Dreman’s portfolio, it is clear that he does not take large, overweighted positions, and his overall investment in Mack-Cali is fairly modest.  Still, it is telling that he is buying REITs at all given the recent volatility in their share prices.

At current prices, Mack-Cali yields a juicy 5.6%.  Though disturbingly, the dividend was recently cut by a third.  I like David Dreman, and recommend you read his books.  But as a general rule, I don’t like to buy REITs with falling dividends.  In fact, I like to see a long track record of growing dividends.  I would gladly take a Realty Income (O) or a National Retail Properties (NNN) over Mack-Cali.

Speaking of Realty Income, I noticed that my favorite REIT recently popped up in the portfolio of quantitative hedge fund legend Jim Simons, the CEO of Renaissance Technologies.

Renaissance Technologies returns over the years have been mind-blowing.  If fact, if I hadn’t already been familiar with Simons, I would have assumed his returns were bogus.  They seem too good to be true.  Simons’ Medallion fund became the stuff of legends by generating annual returns in excess of 35%since 1988…and that was after the fund’s hefty fees were taken out.

Renaissance Technologies added shares of Realty Income in the second quarter. Given Renaissance Technologies’ fast-moving trading style, it’s possible that they already liquidated the position.  Still, other gurus have been snapping up shares as well, including Ray Dalio and Steven Cohen.

Because of Realty Income’s position as a “bond substitute,” its share price has been hit particularly hard among REITs.  The same is true for its peers in the conservative triple-net retail sector.  But at current prices, Realty Income yields 5.4%  And I should emphasize that this is one of the most consistent dividend payers (and serial raisers) you can find on any stock exchange in the world.  This is a REIT that skated through the 2008 meltdown with nary a scratch.

I suspect that were I to write this article next quarter, I might find quite a few new smart money gurus among its owners.

Disclosures: Sizemore Capital is long O and NNN.

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What’s Warren Buffett Buying?

It’s that time again.  Warren Buffett’s Berkshire Hathaway (BRK-A) released its quarterly 13F filing today, which details stock by stock what Buffett and his managers have been buying and selling.

At the top of the list?  A 17.8-million-share position in Suncor Energy (SU), Canada’s biggest oil and gas producer.  Suncor is a major producer in the Alberta oil sands, and this purchase is consistent with Buffett’s overall belief in a North American industrial renaissance.

Next is Dish Network (DISH), the satellite television provider. Berkshire Hathaway added 547,312 shares of Dish, worth about $24 million.  The relatively small size of the acquisition indicates it was probably made by one of Buffett’s lieutenants and not the Sage himself.  Still, given that Buffett’s two managers—Todd Combs and Ted Weschler—are front runners to take control of Berkshire Hathaway’s portfolio once Buffett eventually retires, the move is worth noting.

Dish is an odd addition for Berkshire Hathaway given that archrival DirecTV (DTV) is already in the portfolio and has been for a few years now.  It’s even stranger when you consider the high drama surrounding Dish and its CEO Charlie Ergen and its failed bid to purchase Sprint (S) and Clearwire for their spectrum assets.

Ergen had grand ambitions of using Sprint’s bandwidth to create something of a wireless empire that would have included paid TV, phone service, and wireless internet…which sounds great, except that he would have been entering an already crowded market in all three services.  And in any event, he got outbid.

Buffett is not known for endorsing great jumps into the unknown. Dish seems an odd addition to a generally conservative, staid portfolio.  It’s highly-indebted, not particularly cheap, and operates in an industry in the middle of a transformation with a very uncertain outcome.  I’m left scratching my head on this one.

In addition to Dish and Suncor, Buffett massively increased his position in General Motors (GM), adding about 60% to a position now worth $1.4 billion.  Like Suncor, this move is more in line with Buffett’s belief in America’s industrial future.  It’s also an established player in an old-line industry trading for a reasonable price.  Classic Buffett.

And what did Buffett sell?

He cut his positions in packaged foods companies Kraft Foods (KRFT) and Mondelez (MDLZ) to nearly zero.

Until his next letter to shareholders comes out, we’re left to speculate as to why Buffett unloaded these two.  My guess is simply that he wanted to free up cash for another big purchase.

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