In a new monthly issue, the research team of The Manual of Ideas profiles twenty so-called “magic formula” investment candidates. The term originated with Joel Greenblatt’s The Little Book That Beats the Market, in which Greenblatt argued that high-quality businesses trading at below-average prices tended to outperform the market indices over time. The “magic formula” defines quality by unlevered returns on capital employed. It defines cheapness based on operating income to enterprise value, i.e., also ignoring leverage effects.

As I have written in The Manual of Ideas (the book), a number of issues affect the applicability of the “magic formula”. That said, the approach has merit and deserves to be an input into most value-oriented idea generation processes.

Also inside the new monthly issue, we share exclusive interviews with fellow value investors Javier Ruiz of Metagestión in Spain, Alejandro Estebaranz of True Value Fund in Spain, and Roberto Oscoy of Gerbera Capital in Mexico.

States Javier Ruiz,

We look for good capital allocators or, at least, we do not invest in businesses run by destructors of capital. Quoting Charlie Munger, we love cannibals, managers that repurchase shares with the excess cash their business generates. One example of this in the Spanish market would be Barón de Ley

States Alejandro Estebaranz,

…we have had success with Constellation Software in our fund; it has always been a top holding for us. By studying this sector, we came across Enghouse Systems, Descartes Group, and Opentext

States Roberto Oscoy,

While we do run certain value screens, we also tend to look at companies based on market developments in an attempt to take advantage of Mr. Market’s vagaries… Qualitas is a Mexican auto-insurance company in which we invested at the beginning of the year…

As always, we also analyze selected investment ideas, in this case twenty “magic formula” investment candidates.

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Table of Contents

EDITORIAL COMMENTARY 3

ALEJANDRO ESTEBARANZ ON INSISTING ON THE RIGHT PRICE 6

PROFILING “MAGIC FORMULA” INVESTMENT CANDIDATES 8
AVID TECHNOLOGY (AVID) – BLUM, COVE STREET, VAN DEN BERG, DFA, PARADIGM, ROYCE 8
BLUE BIRD (BLBD) – AMERICAN SECURITIES, COLISEUM, SPITFIRE, OVERLAND, BREITHORN 12
CISCO SYSTEMS (CSCO) – WELLINGTON, FIDELITY, DODGE & COX, T. ROWE, NORDEA 16
DHI GROUP (DHX) – STERLING, DFA, LSV, NUMERIC, ACADIAN, CLEARBRIDGE, PANAGORA 20
GILEAD SCIENCES (GILD) – FIDELITY, CAP RE, JPM, T. ROWE, TEMASEK, ALLIANCE 24
GRAHAM HOLDINGS (GHC) – DON GRAHAM, SOUTHEASTERN, CAP RE, BERKSHIRE, AQR 28
HEIDRICK & STRUGGLES (HSII) – PARADICE, DFA, HEARTLAND, TEMPLETON, STADIUM, ROYCE 32
ICONIX BRAND GROUP (ICON) – HUBER, SPORTS DIRECT, DFA, VAN BERKOM, JPM 36
LEIDOS HOLDINGS (LDOS) – MSIM, BLACKROCK, JOHN HANCOCK, MFS, COLUMBIA, FIDELITY 40
MALIBU BOATS (MBUU) – DELAWARE, JPM, WELLINGTON, BRANDYWINE, PUNCH, PEREGRINE 44
MICHAEL KORS (KORS) – FLOSSBACH VON STORCH, TEMPLETON, ARONSON, GREENLIGHT 48
MOTORCAR PARTS OF AMERICA (MPAA) – FINE, COLUMBIA, RANGER, DFA, RIVER ROAD 52
NATURAL HEALTH (NHTC) – BAILLIE, CAP WORLD, T. ROWE, FISHER, HILLHOUSE, VIKING 56
PITNEY BOWES (PBI) – IRIDIAN, BLEICHROEDER, WESTWOOD, D.E. SHAW, LSV, TOCQUEVILLE 60
STRAYER (STRA) – T. ROWE, MARSHFIELD, GOODNOW, DFA, BURGUNDY, RENTECH 64
TEGNA (TGNA) – ICAHN, DIAMOND HILL, NEWSOUTH, ARIEL, FAIRPOINTE, SMEAD 68
UNISYS (UIS) – FAIRPOINTE, FIDELITY, ROYCE, TOWLE, RENTECH, JHL, DFA, DEUTSCHE 72
VECTRUS (VEC) – BLACKROCK, JPM, ACADIAN, LSV, KNIGHTSBRIDGE, BREITHORN, DFA 76
VIACOM (VIA.B) – SUMNER REDSTONE, CAP RE, BLACKROCK, LSV, FIDELITY, T. ROWE 80
WABASH NATIONAL (WNC) – DFA, LSV, NUMERIC, QMA, VICTORY, FRANKLIN, GOTHAM 84

JAVIER RUIZ ON COMPETITIVELY ADVANTAGED BUSINESSES 88

TEN ESSENTIAL SCREENS FOR VALUE INVESTORS 91
“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME 91
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES 92
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES 93
CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE) 94
CONTRARIAN: CHEAP FREE CASH FLOW GUSHERS 95
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK 96
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS 97
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE 98
DEEP VALUE: NEGLECTED GROSS PROFITEERS 99
ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS 100

ROBERTO OSCOY ON VALUE AND PRIVATE EQUITY IN MEXICO 101

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About The Manual of Ideas

Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top holdings of top fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors.

Our research team has extensive experience in industry and security analysis, equity valuation, and investment management. We bring a “buy side” mindset to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.