AIG smackdown = Get into XLF

While working on my playbook, I couldn't help but notice the AIG news today. AIG reported a $5.3 billion dollar quarterly loss today which has riled the markets. I have been watching XLF the last few days and think it is a good time to open up a position for the long haul. There is no need to over analyze this if you fundamentally believe in the long term sustainability of the US capital markets (which I do). I know this is hard to fathom at the moment, but XLF makes sense right now.

Playbook

I've been keeping busy digesting and analyzing information for the last little while but I wanted to share some possible ideas that will help my approach going into the 2nd quarter.

The Ten Grand portfolio has stumbled a bit out of the gate, most notably my call on NutriSystem (NTRI). There have been a few companies I have been following of late, but I haven't completed the full set of research. The problem as you can see is that without a playbook, you really don't have anything to act on when the market moves in your favor. Some of you can relate the sense of urgency you may feel when things go on sale, but you're not sure what to buy. Here are some of the high level things I'm working on that should be out over the next few weeks. My playbook:

• Finish up my analysis of Trimeris (TRMS) and Intevac (IVAC), both members of the portfolio.
• Dig up some possible education service sector plays based on my analysis of the ISM index released last month. Need to find out how private loan risks are affecting this sector, and see which company's are managing it well. The last time I went through a recession, it was during the dot com bust and from my experience a lot of folks went back to school to brush up on other skills.
• Men's Warehouse has been beaten up recently due to the softening retail sector. I picked up this idea from an article I read in the Chicago Tribune about what some of the seasoned analysts would do with $10,000. This specific article was one of the many catalysts that caused me to think about this site and my approach.
• Follow up on what happened with NutriSystem (NTRI), and start analyzing Amazon's (AMZN) strategic direction more closely. My initial analysis of Amazon told me to stay away due to valuation concerns, but if the price keeps sliding, and they show some good strategic moves for margin expansion a possible entry point may be in order.

Happy investing.

Why Copper Makes Cents (PCU)

Disclosure: I own a long position in PCU.

When you turn on the TV these days or open up the papers, there is much talk about investors parking their money into gold. It’s “safe” and “recession proof” as some people say. If you had picked up gold a few years ago, it definitely would have been a wise investment choice. Copper, on the other hand isn’t a commodity that is covered as much. It is less lustrous after all and not good enough for anyone’s engagement ring. It is however used to build stuff, and a lot of it.

The recent market weakness has punished some mining companies to some good value ranges. Southern Copper Corporation slipped into my screen thanks to the falling stock price. This is my next company of focus.

What does Southern Copper do?

Southern Copper Corporation has been in the business exploring, digging up dirt, extracting, and refining copper, molybdenum, zinc and silver for the open market since 1960. The company has done well to vertically integrate their operations. This essentially means they manage the whole production process from mining to transport and logistics using their own employees and equipment [1]. The company sells the material to various companies which in turn use it to manufacture products. Copper in particular is the main source of revenues for the company and is used in a wide variety of products from the tubing in your house to electronics in your computer. They currently have mining and refining operations in Peru and Mexico, and currently have exploration projects in Chile [1].

Why I am investing in Southern Copper

Investing in Southern Copper comes down to a few simple things:

1. They had slipped down into my stock screen that I used in testing Joel Greenblatt’s magic formula system (low P/E, high Return on Assets). Keep in mind that this is just one of the many basic screens in searching for value. The company has also been rewarding their shareholders with some very nice dividend yields.
2. The company continues to focus on increasing operational efficiencies with several investments in mining and refining equipment. The company can not control copper prices, and are at the mercy of global demand. This is a good thing right now as copper prices continue to rise.
3. Copper demand continues to grow world wide, but inventories remain low [2].

Let’s focus on each of these points in more detail.

Value: The company has shown very excellent values of late. Just to give a quick overview I decided to compare Southern Copper to its bigger brother, the juggernaut mining company Freeport-McMoRan Copper and Gold Inc. (FCX) in relation to some basic measures:

Both companies are finely tuned, but sometimes I have a tendency to pick the 2nd fiddler that doesn’t have as much focus, but manages to generate extreme margins and returns. You could say it gets back to the time in my life when I first saw Rocky Balboa beat Ivan Drago. But this isn’t about Southern Copper being a better investment than Freeport, this is about Southern Copper just being a good investment period. The company has also treated their shareholders very well with healthy dividend yields. Just for carrying their stock, they have rewarded their shareholders $6.50/share over the past 4 quarters which equates to roughly a 6% yield [1].

They have been able to do this because copper prices have continued their upward climb. I mentioned earlier that Southern Copper can not control copper prices which can be construed as a major risk to the company’s forward revenues, profits, and dividend distributions. However, part of my decision to add this to the Ten Grand portfolio has more to do with global demand for copper. More about this in a bit.

Investing in capacity and mining technology: I am not a geologist, mining specialist, or an industrial engineer, but what I do know is Southern Copper has made choices to invest capital back into digging up more copper. Based on global demand for copper this is obviously a good move. The company just recently finished up studies on the “Tia Maria” project which will require a $65 million investment. When this project is completed it will output approximately 120,000 tons of copper per year.

Global Demand for Copper: Global demand for copper has increased 7.2% in the first 10 months of 2007 from the same period in 2006 [4]. This growth in demand for copper has caused copper prices to grow skyward. Southern Copper’s future results ride on how high copper prices will go. Prices rise, revenues rise, and then profits rise. Well, that doesn’t really offer up any intelligent insight. However, I wanted to get an idea of copper prices’ affinity to Southern Copper’s revenues and profits over the past 5 years. I also wanted to examine what investor sentiment was like for the company’s shares during this time in relation to copper prices. Combining all of these relationships would give me a high level overview of how efficient Southern Copper was at squeezing out all those nice profits as copper prices rose, and an indication of market sentiment regarding the company’s value. Sometimes companies can really screw up profit margins as revenues rise (ie. Very bad management, bloated operations, etc.)

I was curious to see how PCU shares traded in relation to copper prices, and there was no surprise here as the market has latched on to the trend and has been pushing the share price higher the past few years. One can argue that market expectations may have gotten a little ahead of itself lately, with the increasing spread between copper prices and PCU’s share price. However, my cash flow analysis shows the company’s share price is currently trading within a good valuation range:

The next thing I wanted to analyze was Southern Copper’s revenue growth in relation to copper prices. Mining operations have only so much capacity. What I wanted to see was Southern Copper’s ability to grow revenues in line with rising copper prices. Accomplishing this would mean the company leveraged existing mines through more efficiency, or demonstrated the speed at which new mines were launched and utilized, or a combination of both. This would give me the confidence in Southern Copper’s ability to increase mining capacity quickly to satisfy rising demand.

Last but not least, if Southern Copper runs a finely tuned operation, their bottom line earnings should trend in line with rising copper prices:

So now that we know the relative relationship of the company’s earnings to copper prices, we have to predict where copper prices are going in the future. This is the hardest part of the analysis and I don’t think anyone out there can accurately predict where copper prices are heading. If there were, some of them got into copper 5 years ago and are living large at the moment. Prices are dictated by world supply and demand. In this playing field, China has a big appetite for copper. Let’s dig a little deeper to find out what Southern Copper is doing to feed this appetite.

Southern Copper’s sales breakdown by segment from 2006 shows the majority of the sales (30%) going to the United States, whose economy is currently softening. This would explain some of the recent weakness in the company’s stock and its fourth quarter drop in net income compared to the same period a year ago. Asia represents a smaller 6% of Southern Copper’s total sales. In order to keep revenues afloat, the company is shifting a sizeable chunk of its North American sales (12%) to Asia [5].

We now need to make an estimate on whether the China’s economic growth will continue to grow, and in turn keep copper prices moving higher or at least stable. China currently consumes 22.7% of the world’s copper production [2], while the country’s GDP growth will continue at an estimate rate of 10.6% in 2008 [3]. Although the estimate is toned down somewhat from the current 11.1% in 2007, this still represents massive economic growth. The International Copper Study Group recently released world supply and demand for copper last month which illustrates lower operating supplies since 2006:

• In the report, the first 10 months of 2007 show the copper market operating at a deficit of about 220,000 metric tons. Compared to the same period in 2006, the global copper market operated with a surplus of 78,000 tons [4].
• World usage of refined copper was primarily driven by China’s massive consumption as it grew by 37% in the same period. Net Imports by China of refined copper increased by 170% [4].
• World demand is exceeding at a faster rate than production [4].

Southern Copper obviously has more access to detailed data, and its action to move its capacity to serve Asia’s need will help the company realize this opportunity. COMEX futures (forward prices of copper that 2 parties agree to buy/sell copper at) show prices still hovering at record highs in the $3.50’s/lb range for the first half of 2008 [6]. This helps gauge the company’s growth, its worth, and thus a value for its shares.

What is Southern Copper’s business worth?

The next step is to determine the best and worst case scenario for the company’s outlook to determine where the company’s shares should be valued at. The following assumptions were used to determine the company’s future cash flows for the business:

• Based on the company’s 2007 year performance, we estimate the company’s cost of capital to be 6.28%. This is basically how much it costs Southern Copper to finance its initiatives with a mixture of public investment (equity) and debt financing.
• The company has been in operation since 1960, and will see continued operations for the next 10 years. In our worst case scenario, I am assuming the US falls into a recession and copper demand within the US falling off dramatically, with China absorbing some of this brunt. From 2008 to 2012, revenue growth was fixed at 5% per year.
• From 2013 to 2017, I dropped the growth estimates to 1% growth. From Year 2018 onwards I also fixed annual growth at 1%. This is a commodity based business after all, and at some point global production will catch up with global demand.
• Costs and SG&A (selling, general, and administrative expenses) were averaged out over the past 5 years of operation to forecast these amounts as a percentage of the overall company’s revenue going forward.

The worst case scenario results in the following value for all future cash available to the firm, resulting in a value of $83.20/share:

Now let’s look at the best case scenario. The company has experienced annualized revenue growth of 31% over the past 5 years. Assuming copper continues to be in demand, and prices trend slightly higher, I toned the growth down to 10% annualized growth for the next 5 years. I then moved revenue growth down to 1% for each year thereafter. This results in a valuation of $105.16/share.

Based on this range [83.20 - 105.16], I’ll be looking to add to my existing position if the company’s shares fall further. I know I am already deviating away my initial test of Joel Greenbelt’s magic formula system, but I feel the argument for Southern Copper remains relatively strong.

What are the impending risks to the business?

There are some impeding risks to the business to keep in mind:

A global recession: The US drags down everyone, and with it copper prices. There is much heated debated about whether the emerging markets are tied to the US economy or not. There obviously is a relationship, but current growth rates in China, India, and other emerging markets aren’t showing any signs of weakness.

Labor Problems: One reader brought to my attention, the company’s recent labor problems with their work force. The work stoppage last year didn’t help matters and severely affected the company’s revenue streams. The company has taken steps to resolve their labor disputes. Considering the company holds selling, general, and administrative expenses (SG&A) relative to revenues at a low 1.62%, paying the workers more will not put a big dent the company’s bottom line. Southern Copper needs to respect the front line to keep things humming.

Beijing Olympics: (warning, my funky economic theory) Market valuations in China have soared to blistering levels. The Chinese market indexes could possibly be propped up at these high levels to ensure the Olympic Games runs smoothly. Chinese culture considers “face” extremely important. Once the Games have come and gone, any type of violent market adjustment downward may have rummaging effects on the country’s growth, thus reducing the need for copper. If this happens at the same time during US economic weakness, there will be more things to worry about besides Southern Copper (like my job). If this were to materialize it would be out of Southern Copper’s control.

Given the risks, I still consider my position a good one. Copper makes a lot of sense at the moment, and I hope it will wring out some good returns for the Ten Grand portfolio. I welcome any feedback out there, especially from any commodity experts.

Related Topics: The World Copper Fact Book, ISCG

References:

[1]. 2006 10k for Southern Copper, http://www.southernperu.com/InvestorRelations/tabid/53/Default.aspx

[2] Why Copper Prices Keep Rolling On, Feb.2nd, 2008, Wall Street Journal Online, http://online.wsj.com/article/SB120188486345735597.html

[3] Global Economic Forecasts, UBS., Sept.24th, 2007. http://www.ubs.com/1/e/ubs_ch/wealth_mgmt_ch/research/global.html#growth

[4] Copper: Preliminary Data for October 2007, International Copper Study Group, Jan.21st, 2008. http://www.icsg.org/News/Press_Release/presrels_2008_01.pdf

[5] Southern Copper Heads East (PCU), Jan.29th, 2008. http://research.investopedia.com/news/IA/2008/Southern_Copper_Heads_East_PCU.aspx?ad=IA_RSS_1292008&partner=fincon-rss

[6] Comex Futures Feb.11.2008 Session, http://www.nymex.com/cop_fut_psf.aspx

[7] Southern Copper Coperation Results, Fourth Quarter and 2007 Results, http://www.southernperu.com/InvestorRelations/tabid/53/Default.aspx

Stocks Analyzed

AMZN, Amazon.com
DST, DST Systems Inc.
NTRI, NutriSystem
PCU, Southern Copper Corporation
TRMS, Trimeris
DV, DeVry, Inc.
STRA, Strayer
MLHR, Herman Miller

Big Players moving in and out of NutriSystem

It looks like the big investors are taking up action on Nutrisystem this past month (a member of the ten grand portfolio).

Firms who like the value:

• Citigroup Financial Products, increases total stake to 5.9%
• Bridger Management, increases total stake to 5.3%
• Legg Mason Oppotrunity Trust, increases total stake 10.2%

Firms who had enough:
Turner Investment Partners, sold off more than 5% of its shares.

What's interesting is that Gregory R. Badishkanian, a Citi Investment Research analyst removed NTRI from their "top picks" citing possible first quarter softness. He still recommends a buy rating though. Why would you do that if your firm just bought 2.1 million shares of NTRI just a few days ago? What's the difference between a top pick, and a buy rating?

Who am I to call out Citigroup though? These folks manage gajillions of dollars. I'm just managing a measley 10k. I guess we'll just have to wait and see on Feb.19th when NurtiSystem reports.

You can read the full Forbes article detailing these moves. I did an analysis of NutriSystem just a few weeks ago and don't think the competing alternative drug (Alli) will have long lasting impacts.

What is the ISM Services Index? (a possible Education play)

The market had a field day with the DOW dropping 370 points today. All of this because the Institute of Supply Management released the non-manufacturing (services) report indicating a contraction in the service sector’s business activity to 41.9% in January from 54.4% in December.[1]

My first gut reaction was quite a shock. When you look at magnitude of such a drop you wonder if we really are heading into a recession. Maybe we are in one already. But what does 41.9% really mean? Are the investment powerhouses reacting off the gun, selling off their positions, protect their assets, and asking questions later? What does 54.4% really mean? What specific areas of the service sector contributes to this number and how is it calculated?

Having knowledge of such economic factors can help guide investment decisions, so I thought I’d try to break out the meaning of this index over lunch today. I wanted to see if there was any way to utilize the report to optimize my portfolio for the rest of the year. First, we need to break down the ISM service index.

Non-Manufacturing

The report attempts to gauge how the service sector of the US economy is doing. For example, it will cover how the hotels and restaurants are doing as opposed to how Ford is doing. The Institute of Supply Chain Management sends out surveys every month to these businesses to answer a few simple questions. The survey isn’t just sent out to anyone, but directed towards the people who have the power to buy stuff and hire people. If you aggregate enough of this information you should be able to get a pretty good gauge of the service sector’s health.

What does the Non-Manufacturing Index try to measure?

The index is really comprised of 4 components and tries to measure if the overall service sector is contracting, staying the same, or expanding. The ISM just started doing the composite version of the formula in January 2008 to most likely get a better picture of everything. The 4 components are:

• Business Activity (general business condition)
• Employment (hiring more, freezing, and layoffs… I hope not)
• New Orders (are you buying more stuff, or less?)
• Supplier Deliveries (how is fast are your suppliers delivering stuff?)

In each of these components, the respondents must answer one of the following about what changed regarding a given set of criteria. The 3 answers to choose from are Better, Same, or Worse. Example:

What you end up with is an allocation of answers into those 3 buckets for each of the 4 main components mentioned above. Each of the 4 components will have a series of questions. Let’s take the Employment category for example. Let’s say one of the questions was posed:

At first glance what does that look like to you? It’s more weighted on the worse side of the fence, so sentiment amongst purchasing executives in the service sector see employment activity worsening. The ISM then uses what is called a “diffusion index” to make the number easier to digest. When you go month to month, the breakdown amongst the 3 buckets will vary. It’s harder to gauge how bad or good something is doing. So using a “diffusion index” pretty much generates a single number to streamline it a bit. The formula takes the “Better” component and adds it to one-half of the “Same” component [2]. So using the example we have above, the index value for this question would be:

6% + (70% divided by 2) = 41%

Now let’s try another scenario:

What does this look like now? It looks like nothing has changed really as 5% of respondents think things are getting better, and 5% think it’s getting worse. The remaining 90% see nothing changing. Running this through the formula you get:

5% + (90% divided by 2) = 50%

And that’s the simple beauty of a “diffusion index”. 50% means nothing changed. If the number dips below 50%, the survey respondents overall think things will move in the “worse” direction. If the number moves above 50% then overall sentiment moves towards the “better” direction.

So what ISM does is average out all these index values for all the questions in the survey and adjusts it for seasonality changes. The resulting Employee Activity index value for January was 43.9%.

The overall measure is to equally weight the 4 components (just average them out). This is what you get:

What am I supposed to do with this data?

Everyone is going to interpret this differently but it sure seems like everyone was selling today on the news. There maybe an opportunity when everyone is moving like a charging herd in one direction. Digging further into the ISM report I extrapolated some nuggets of good info.

In each of the 4 main components, there are some areas of the service sector that actually show positive growth. Now let’s say you take any given stock screen and then apply another filter to weed out those companies that belong in those positive growth areas identified by the ISM report. Maybe those sectors are recession proof or are benefiting from weak US dollar through foreign exports?

Let’s see which sectors experienced growth despite the downbeat message (the winners) [1]:

• Business Activity : Utilities and Educational Services
• New Orders: Utilities; Professional, Scientific & Technical Services; Educational Services; and Health Care & Social Assistance
• Employment Activity: Transportation & Warehousing
• Supplier Deliveries: Management of Companies & Support Services; Wholesale Trade; Educational Services; Finance & Insurance; Public Administration; and Information.

At first glance a few service sectors seem to have a pattern, particularly Educational Services which show up in 3 out of the 4 main components that showed growth. You could take some of this data and scan for those well managed companies that belong in the educational services sector which have also experienced a sell off. If next month’s report demonstrates the same pattern, and the market continues to beat down companies that generate good cash flow, it will provide a good base for my next set picks.

The report contains a lot of interesting data, yet I wonder how many people actually read it. Ready, Fire, Aim.

References:

1. January 2008 Non-Manufacturing ISM Report on Business, http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943

2. ISM Report on Business Frequently Asked Questions, http://www.ism.ws/ISMReport/content.cfm?ItemNumber=10706&navItemNumber=12957

When to Exit?

A lot of analysts, investors, traders, and ordinary people like me sometimes spend more time focusing on when to enter into a position, but not on when to exit. So far my first lot of stocks from my test of Mr.Greenblatt’s system is doing ok, although it is still very early. The system calls for the investor to exit their winning positions exactly 1 year after purchase to minimize the capital gains tax impact (to 15%), and to exit losing positions 1 day before the year’s end to maximize capital gains losses. Now my question to you, especially the investors who focus more on fundamental analysis, is when to exit a position if it suddenly reaches your target valuation in a very short time period. You are put into a position where your investment has done very well, but almost too fast. The value is suddenly wiped out.

You could stick with it for the long haul if you believe the company has more tricks up its sleeve to push their competitive advantages further, or you can lock in those gains, eat the capital gains hit, forget about it, and look for the next investment proposition. It’s also interesting to note that this goes against the strategy of John C. Bogle, another famous investor and founder of Vanguard. Transaction costs hurt, but it is extremely tough to resist the temptation to lock in gains and look for the next big story. Just forward thinking here, and would love to hear some of your feedback.

There have been many times when I wished I had held on, and other times when I wish I had exited. Exiting is half the battle. I wish it was a science.

Of course some technical analysts will treat this as a science, and will tell me when the perfect exit point is. I’m open to all opinions. I know nothing about technical analysis (yet), but would love to hear from them as well.

(side note: It looks like I messed up my last analysis on DST Systems, Inc. CNTRL-C, CNTRL-V doesn’t work after watching a good football game. I apologize for that. I was up late watching Manning throw Tyree the one handed helmet catch. What a game. The dog ate my analysis homework :) Actually, it’s on my home laptop, I’ll post it later when I get back home.)

Pushing Paper (DST)

Disclosure: I sold DST on Feb/5/2008

I used to love watching cop shows back in the 80’s, cop movies, or more recently Law and Order SVU. You know the scenes where the cop crosses the line by punching the suspect at the station, which is then followed up by the Captain ordering the cop to desk duty with the following quip, “You do that again Sonny and you’ll be pushing paper for the rest of your life!”. Pushing paper is hard work, it’s tedious, and record keeping is a pain. With Sarbanes-Oxley compliance riddling corporate America these days it can be a painstaking process. Businesses want to focus on what they do best to increase their competitive advantages and innovate. However, some people push paper very well and make a lot of money doing it. Which brings me to one of the companies in my ten grand portfolio, DST Systems Inc. They surfaced in one of my screens when I decided to give Joel Greenblatt’s magic formula system a test. One of Mr.Greenblatt’s formula criteria is to scan for companies with a high return on assets (ROA). DST Systems showed up in this screen, but their impressive ROA maybe a bit misleading for this test since I consider DST a service based company. Service based companies rely on their people to drive profits, and those employees are not booked as assets, which can skew the interpretation of ROA

What does DST Systems do?

The company started out in 1969 to develop automated record keeping systems for the mutual fund industry. They are pretty much the largest provider of outsourced shareholder recordkeeping services in the United States¹. Below is just a sample of some of their service offerings for the financial and healthcare industries (their main customers):

• Business Process Management
• Business Process Outsourcing
• Annuity and Mail processing for the Insurance Industry
• Integrated print and electronic communications solutions
• International Asset Management and & Portfolio Accounting
• U.S. Mutual Fund Shareholder Recordkeeping

That’s a lot of fancy words. Breaking this down, their strength is in managing a massive amount of records, moving them, storing them, printing them, and reporting them. The main customer segments in which they provide these services are the financial and healthcare industries. They do offer more services, but this company was hard to break down in terms of business services so I stuck to the main components of the business.

What is the business worth?

This is where things get a little interesting. This company was extremely hard to value because of the various forms of financing the company uses (the company doesn’t list out exact terms of its debt undertaken and provided only interest rate ranges. This makes it very hard to determine the company’s cost of capital). There was also a peculiar entry on the company’s income statement categorized under Revenues as “out of pocket reimbursements”. I had never seen this before and didn’t know what to make of it. These reimbursement revenues represent a substantial portion of the company’s revenues. Digging further into their annual report I came across the footnote explaining these revenues:

The Company’s significant Out-of-Pocket (“OOP”) expenditures include postage and telecommunication costs which are reimbursed by the customer. OOP expenses are included in costs and expenses.

So what this means is that all those forms that the company mails out via regular USPS postage and electronic communication are initially paid out by DST. However, the company in turn asks their customers (mutual fund companies for instance) to reimburse this cost back to them. In effect it is a zero sum game, unless the DST is boosting margins to cover this cost and then some. What is a cause for concern is that as we move into digital delivery these costs and revenues will not play a big factor as they do today (how many times has your brokerage or bank asked you to move to electronic statements via email?). In order to value this business going forward you would have to scale this down. The problem is the 10K and annual reports of the company don’t really break down the composition of this component under SG&A. This in turn makes it very hard to properly value the company.

I didn’t really have any solid ground at this point, so I decided to include these “out of pocket” items into Revenue and SG&A estimations going forward. I wish I could give a better reason than that.

The company initially looked relatively attractive with an extremely low P/E of 5.8x (ttm), return on assets of 28%, and steady good revenue growth based on my projections. There are a few problems with the criteria though:

• The company boosted its earnings this year through the sale of one of their business units (Asurion). This is a non-recurring event and threw off the P/E and ROA values by making them look better than they actually were
• I consider DST to be a service based company and running ROA on service based companies doesn’t really provide any value (employees can’t be booked as an asset on the balance sheet, although for service based company’s they are key to generating revenue growth).

It’s now time for my utter mistake including this position in my ten grand portfolio. Owning up to my mistakes is part of the deal, and learning from them all the more important into growing ten grand. The resulting cash flow analysis shows revenue growing at a nice steady rate, but free cash flow to the firm diverging. That is bad, very bad.

Based on my assumptions of 12% continuous annual growth for the next 5 years, tailing off to 5% from that point forward results in a value of approximately $15.47/share. I had acquired DST at $73.60. Ouch.

Lessons Learned

• Using any type of screen criteria is just that. A screen. You need to dig deep to find the details.
• Joel Greenblatt’s magic formula system can work against you if you don’t watch out for those gotchas. In any case, I’m still going to continue testing out his theory, just need to be a bit more careful.
• It looks like the asset sale of Asurion and their planned stock buyback is more of a move to pay down debt and keep the stock price stable, and not indicative of a fundamental change to improve the core aspect of their service business.
• I need to exit this position in the next couple of days. There are better values out there.
• I should bask in the glory of pushing paper as the police captain said. Push and wade through 10-Q’s and 10-K’s like there is no tomorrow.

References

1. DST Systems Inc. company profile, http://www.dstsystems.com/cp/cphm.html