The Future is in Plastic

As I scanned the Magic Formula stock screener for a stock I'd want to hold indefinitely, one company stood out: Visa (V). It's not a credit card company, but a global financial network that allows credit, debit, and prepaid cards to work. What I like about Visa:

• Name brand recognition and reputation
• International growth
• Low debt
• Stock buy-backs
• Increasing dividends

A few other stocks I considered and rejected:

Microsoft (MSFT): a little too much debt, a little too much competition from others. Their Mickey Mouse Word and Excel 2007 don't endear them to me, either. I use different word processing and spreadsheet software that I downloaded legally for free. It kind of reminds me of what Internet Explorer did to Netscape.

Altria (MO): Revenue has been going down for years. Maybe word has gotten out that cigarettes are unhealthy; maybe the taxes are too high; maybe they've been banned in too many places; maybe the recession has made a lot of people kick the habit. I'm not going to make it my problem.

Full House Resorts (FLL): They're going $30 million into debt to buy another casino. If it doesn't work out, the company will have a hard time absorbing that loss. Someone once said that change and profits usually don't go together. But good luck to them!

Coach: to Sell or Hold?

Back in 2008, Coach (COH) showed up on the Magic Formula stock screener. I researched it and liked what I found: low debt, lots of growth, and a high-quality product. A coworker remarked that everyone and her sister carried a $500 Coach bag, and looking around downtown Denver where I worked, I saw he was right. As I recall, Coach was busy establishing a beachhead in China and closing some lower-earning stores.

It didn't matter that I didn't understand why anyone would pay $500 for a purse. Two of my purses, a fabric Sack and a no-name raffia, cost $3 at thrift stores. A few months ago, I went wild and spent $50 on a gently used nylon Kenneth Cole handbag that I carry every day now. (The store owner called it "handsome.") I don't buy Coach purses--that's why I have money to spend on Coach stock.

I paid around $30 a share for Coach in 2008 and now it's trading in the high $50s. In my IRAs, I put a big bet on it and held it for two years, even though that wasn't according to the Magic Formula. It was just such a good company. I also have Coach in my non-IRA account, and wondered whether I should sell it or hold it. On the one hand, the Magic Formula has worked well for me. OTOH, Coach is still a great company with growth, low debt and a popular product. If I sold it, I'd have to pay tax on the earnings and find a better investment for my money.

Someone recommended selling enough of the stock to get back what I paid for it, but it seems to me that if it's time to sell, I should sell it all. I looked elsewhere for wisdom.

My handsome new handbag held a book called The Little Book of Value Investing by Christopher H. Browne of Tweedy, Browne & Co. LLC. The company used to be down the hall from Benjamin Graham (a client), and Walter Schloss had a desk in their office. Christopher Browne worked there for about 40 years. Here was just the person to turn to.

In the chapter "Watch the Guys in the Know," Browne says,

There are a lot of reasons insiders may sell shares in their company. They may wish to diversify their holdings, plan their estate, buy a dream house, or pay off a soon-to-be ex-spouse. They may sell shares obtained by exercising stock options. For these reasons, sales by insiders are not as strong an indicator as their buys.

I saw that a lot of insiders were selling Coach (there were several exercises too) but nobody was buying it in the $50s.

In the chapter "Buy and Hold? Really?" Browne says,

Long-term capital gains earned on stocks held for at least a year are taxed at 15%....And that is before any state or local taxes.

Turnover is the enemy of compounding and the friend of the Internal Revenue Service.

Many investors think they should be proactive and keep looking for ways to tweak their investment portfolio when just sitting tight, if they made the correct choices in the first place, often would be the better course.

Billionaires Aren't what they Used to Be

Look who's on Manolo's Shoe Blog:

http://shoeblogs.com/2010/11/30/meanwhile-down-at-the-malt-shop/

Does it Pay to Screen Further?

For the past few years, I've been using Joel Greenblatt's Magic Formula stock screener with great results: 43%, 27%, and 21% for my three IRAs over the past year v. the 9% return on the Standard & Poor's. Looking at the two accounts I've had since 2008, the results are even better: gains of 7% and 40%, whereas the Standard & Poor's index lost 8% and 6%.

I've selected stocks from the Magic Formula screener two ways: randomly choosing stocks on the screener, and screening the stocks further according to value principles such as low debt, brand name and durable competitive advantage, to use Warren Buffet's phrase. Do the stocks I hand pick do better than the ones that simply show up on the screener?

Yesterday I placed an order for eight hand-picked stocks from the screener:

BMY (Bristol Myers Squibb)

CECO (Career Education Corp)

FLL (Full House Resorts)

GPS (Gap Inc.)

HRB (H&R Block)

MHP (McGraw Hill)

V (Visa)

VALU (Value Line)

In my Watch account (which doesn't use real money), I've selected three groups of eight stocks picked from the stock screener, which I set to the minimum amount ($50 million market cap):

Screener A-E:

AGX (Argan Inc.)

AMED (Amedysis)

APOL (Apollo Group)

BDSI (Biodelivery Sciences)

CBST (Cubist Pharmaceuticals)

CNXT (Conexant Systems)

DLX (Deluxe Corp)

ELNK (Earthlink)

Screener F-O:

FRX (Forest Laboratories)

IDCC (Interdigital)

IPXL (Impax Laboratories)

JGBO (Jiangbo Pharmaceutical)

MRX (Medicis Pharmaceutical)

NEWN (New Energy Sys)

OSK (Oshkosh Truck)

PDLI (PDL Biopharma)

Screener P-T:

PPD (Prepaid Legal Services)

PRSC (Providence Service Corp)

PWER (Power One)

SCEI (Sino Clean Energy)

SNDK (Sandisk)

SUPG (Supergen)

TNAV (Telenav)

USMO (USA Mobility)

After one year, I'll see what these groups of stocks have done. (The Magic Formula method requires holding stock for one year only, keeping them only if they are still on the screener).

Of course this little experiment won't show that one method is always better than the other. I just want to see if it's worth my while to screen Magic Formula stocks.