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August Magic Formula Newsletter Pick: A Company at 6x Earnings and a Dividend yield of 6%

August 11, 2012

This month's Magic Formula Newsletter pick is trading at under 6x trailing earnings and currently sports a dividend yield of almost 6%.

But those stats may actually understate just how attractive the company is. There are several clues that indicate the company is worth materially more than today's price. To highlight just a few

  1. A board member and respected value investor activist acquired almost all of his stake in the company at prices 20-40% higher than today's
  2. The company repurchased ~50% of their shares outstanding at prices a bit higher than today's prices
  3. The company recently refinanced some debt and eliminated their dividend covenants, which should allow for a meaningful boost to the dividend. The company could easily afford to pay a dividend that would give them a yield of 15%+ at today's prices and still allow them to pay down debt.
As if all that wasn't enough, the company is an attractive acquisition candidate, operates in a non-cyclical but very profitable niche, and earns ROIC that would make anyone short of Apple's mouth water.

Download this month’s Microcap Magic Formula Newsletter.

GuruFocus publishes three monthly newsletters. These newsletters are the included features for Premium Members.

1. Ben Graham: Net-Net Newsletter focuses on net-net stocks that Ben Graham would buy. It is released on the first Friday of each month.

2. Micro-Cap Magic Formula Newsletter picks companies that have high return on capital and high earnings yield. It is released on the second Friday of each month.

3. Buffett-Munger Best Bargains Newsletter recommends companies that have high business quality, but traded at undervalued prices. A younger Buffett would buy this kind of companies. It is published on the third Friday of each month.

Also don’t miss:

August Ben Graham Net-Net Newsletter

August's pick is a bank with a checkered past that was heavily involved in subprime lending. The bank was required to wind down all subprime products and is in the process of liquidating. The bank has sold their loan portfolio and deposits to a Pennsylvania bank, which is pending approval. The bank is selling for 56% of adjusted book value. Upon sale completion book value will be mostly liquid cash.

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Rating: 5.0/5 (2 votes)


Peticolas - 5 years ago    Report SPAM
OK. I'm new to GuruFocus. Do these newsletter picks have any track record? How big is the bid-ask spread on a company like this (I would describe it as a nano-cap)?
Gurufocus premium member - 5 years ago
The performances of the picks are at the back of the newsletter.

Usually the spread are big. Please use limit order for these.

Peticolas - 5 years ago    Report SPAM
Thanks. Sorry I missed that. So of the current portfolio, about 50/50 on losers/winners. That's not exciting but I do think your numbers sort of understate performance. $6,676 vs $6,000 sounds like a 10% return; however, the total invested capital starts very small and grows over the year so the average invested capital over the period is approximately $3,260. So the return for average capital invested is $676/$3,260 = 20.7%.

Can't think of a quick way to annualize that (but it should be higher) or compare it to the S&P 500, but it seems very good.
Adib Motiwala
Adib Motiwala - 5 years ago    Report SPAM
Also, some of the old picks were sold for good gains.

Please leave your comment:

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