Last round of picks

I neglected to report on my last round of MFI picks. As I mentioned, I felt as though I gave a very cursory at best -and counterproductive at worst- examination of the available companies for my last round of picks. I looked at things like upward momentum. True, I had (by chance) picked stocks on the move in previous rounds, and that has been helpful when a peak turned downward. But when that was the only reason to buy a stock - well, I think there could have been better reasons, that's all. Hey, it seems as though MFI stocks are generally doing poorly these days, and it's only three months, but still... I'd like to have better reasons to own a stock for a year than because it has been going up for a few days. And, OK - these are MFI stocks after all - statistically likely to outperform the market - but I've been doing a lot of reading trying to learn what to look for, and here I was ignoring it all.

With all of that, I took a much more in-depth look at stocks this time 'round. I do still believe that buying when insiders buy is a good start, and so I limited the list of 100 MFI stocks over $1M to those with recent insider buys. That still left 27 stocks to consider. Of these, I ranked them in terms of: Earnings yield, Return on capital, Piotroski Score, Insider buys (by size and number of buys), EBIT slope over the last five years. Thanks to The Dhando Investor, I added FCF valuation relative to market value of the company - Pabrai says that no company is worth more than ten to fifteen times FCF, an then should only be bought at half-price.

Top scorers in each of these categories were: EY - HLYS, (a 13-way tie for ROC), AEO and HWCC for insider buying, MVL for Piotroski Score, DVR for EBIT slope, and USMO for FCF valuation. These and other high-scorers were awarded points for rankings, and the total score lead to the following top five: VPHM, NOOF, USMO, HLYS, AEO. The current ratio was huge for VPHM and HLYS, and pretty good for AEO, NOOF, and USHS. Finally the MOS price as determined by the (black box) automatic Rule #1 MOS generator was pretty good for AEO and HLYS. My one concern with AEO was that it was largely overvalued with regard to FCF, trading at 24-times my calculated FCF value.

In the end, I picked AEO, HLYS, USHS, USMO and VPHM. Note that USMO has a 20% dividend. Also a couple of days after I bought it was revealed that the CEO of AEO had bought over 800,000 shares just after me and at prices just below my buy price.

AEO - the clothing company that is, I think, moderately popular.

HLYS - those roller-shoes that I see kids at the mall wearing all the time.

USHS - home improvement products - possibly a good alternative to buying or selling when the real-estate market is in not doing well.

USMO - wireless communications - a bit of a concern, since this is fairly commoditized, but the between the numbers and the cushion that the dividend gives, I thought this was a reasonable purchase.

VPHM - an old friend in biotech. Yes, their deal with Wyeth fell through, and that product is not going anywhere. There's the old fear of vancocin coming off patent, but the closest competitor is apparently Genzyme's Tolevamer. Recent results with that product were uninspiring, which is good news for VPHM. Maribavir is several months away from finishing phase 3 trials, but this will probably happen within my one year holding period. This means that a big swing in either direction is possible.