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Joel Greenblatt’s Top Fourth-Quarter Magic Formula Stocks

February 28, 2012 | About:
Holly LaFon

Holly LaFon

261 followers
Joel Greenblatt is founder of Gotham Capital and the pioneer of Magic Formula investing. He developed the Magic Formula as a numbers-based, unemotional way for individual investors to beat the market over the long term. It is based on the following principles: · Buy a good business cheap like Ben Graham (figure out what it’s worth and pay a lot less).

· Look at free cash flow to the price we’re paying.

· Look at returns on tangible capital to judge how good it is (get best combo of cheap and good).

· Hold for one year.

Typically the stocks that meet the criteria are brutally hated by the market or have low expectations for the next several years. His top three new stock picks for his Magic Formula Portfolio for the fourth quarter are: Azz Inc. (AZZ), Primoris Services (PRIM) and Caribou Coffee (CBOU).

Azz Inc. (AZZ)

Fort Worth-based Azz Inc. (AZZ) makes electronic equipment and tubular products and provides galvanizing services. Greenblatt bought 19,515 shares of the company at an average of $43 per share in the fourth quarter.

Azz has generated strong cash flow over the last 10 years, with two slightly down years. It grew its revenue at a 10-year rate of 10.9 percent, EBITDA at 22.9 percent, and book value at 17.2 percent. In the last five years it grew cash flow at a rate of 11 percent. Its return on equity has been in the double digits since 2007 and return on assets has been declining for the last four years.

The company’s stock price fell to 52-week lows in the fourth quarter, but began to turn around when the company announced its fourth-quarter financial results. Its net sales had increased to $345.5 million in the first nine months of the year from $280 million in the same period last year. Net sales increased in both its electrical and industrial products and its galvanizing services segments after its electrical and industrial products segment revenue had decreased 20 percent for the full year ended February 2011.

The company’s future prospects will be influenced by the expansion of the solar industry. "I anticipate an overall growth rate of 2 to 3 percent in the coming year. The solar market was and remains the driving force for growth in 2011, and is projected to remain a significant player through 2016,” said Tim Pendley, senior vice president and chief operating officer with AZZ Inc.

Azz’s P/E, P/S and P/B ratios:

AZZ pe,ps,pb Interactive Chart



Primoris Services (PRIM)

Primoris is a contractor and infrastructure company founded in 1946. It provides services related to construction fabrication, maintenance, replacement, water and wastewater and engineering to clients that are typically major public utilities, petrochemical companies, energy companies, municipalities and others. It doubled its size in 2009 and 2010 when it purchased the James Construction Group and Rockford Corporation, respectively. Primoris’ predecessor company, Rhapsody acquisition Corp., had its IPO in 2006, and Primoris merged with Rhapsody in 2008.

Joel Greenblatt bought 59,076 shares at an average price of $13.56 in the fourth quarter. After being relatively flat since its IPO, Primoris’ stock price began to rise dramatically in 2011, and Greenblatt bought on a dip in the fourth quarter. In the last year it has appreciated 87 percent.

Primoris’ free cash flow and revenue in 2010 bounced back from a down year in 2009 and EBITDA grew each year in the same span of time. Return on equity and return on assets have both declined over the three years, but in the third quarter of 2011 came back strongly. ROE increased to 29.3 percent from 16.1 at year-end 2010, and ROA has increased to 11.4 percent from 4.8 percent at year-end 2010.

The third quarter was good in other ways. The company reached its highest revenue and net income in its 60-year history. However, fluctuations in revenue and earnings may occur over the next several quarters as it completes several major projects. On November 30, it announced $181 million in new contracts.

Primoris’ P/E, P/S and P/B ratios:

PRIM pe,ps,pb Interactive Chart



Caribou Coffee (CBOU)

Caribou Coffee is a gourmet coffee company that owns the second-largest number of coffeehouses in the U.S. After rising significantly in the second quarter of 2011, its stock price dropped in the fourth quarter, when Joel Greenblatt purchased it. He bought 52,794 shares at an average price of $13.27.

The company has increased revenue and EBITDA almost every year since 2005, reaching $284 million and $22.4 million, respectively, in 2010. Its return on equity and return on assets also turned positive in 2009 and increased in 2010; return on assets increased from 10.1 percent in 2009 to 15 percent in 2010, and return on assets increased 6 percent to 9.2 percent in 2010. Free cash flow, which Greenblatt typically considers highly important, has been positive only two years since 2005, in 2008 and 2009.

Cofeehouse sales have increased for the last eight quarters, including 4.1 percent in the quarter ended Oct. 2, 2011. Much of the company’s sales growth has come because it has begun selling food.

The outlook for Caribou’s growth is also positive. Daily coffee consumption increased to 40 percent of 18-24 year olds in 2011 from 31 percent of the age group in 2010, returning to its 2009 level, according to the National Coffee Drinking Study from the National Coffee Association. Caribou recently began growing as well. In the third quarter of 2011, it opened three company-owned stores, its first in over three years, and in the fourth quarter, it opened five more. For 2012, it plans to open 55 to 70 new locations and issued fiscal year 2012 net sales growth guidance of 10 percent.

Caribou’s P/E, P/S and P/B ratios:

CBOU pe,ps,pb Interactive Chart



See Joel Greenblatt’s portfolio here and also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Joel Greenblatt.


Rating: 3.4/5 (8 votes)

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