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Strategies & Market Trends : Greenblatt's Little Book That Beats The Market -- Ignore unavailable to you. Want to Upgrade?

To: Shane M who wrote (81)	2/19/2006 10:43:28 PM
From: Stewart Whitman	Read Replies (1) \| Respond to of 218

Well, the Greenblatt ROC of 23-29% doesn't really say that the business is good or a solid performer. Most of the stocks with better ROC's using his calculations tend to be 50% or higher, at least right now. When you compare this raw number to a traditional ROE measure, where one thinks of 20% ROE as being a great business, it sounds really good. But then you're just not comparing apples to apples. I actually think that's one of the nice parts of Greenblatt ranking system. You don't think in terms of absolute values (e.g. 20% is good). It makes you think about how a business is doing relative to a bunch of other businesses. After all, if the economy was really hot, then you would expect a higher range, if it was slow, then you would expect a lower range. The flip side of this is that the Greenblatt system will NEVER tell you to sell all your stocks. Not if the S&P was trading at 1000x earnings, not if bond rates are 15%, not in 1972, not in 1929. It just tells you which stocks to pick out of your universe of stocks. And it suggests that those stocks will outperform others. One of the problems you have with DIIB is the increase in 'intangible assets' over they years - from $6 million to about $262 million in 2 years. On a quick glance, there seems to be a lack of any mention of what these intangibles are in the 40-K, so I can't tell whether this represents an ongoing expenditure or not. In my opinion, intangibles simply can't be eliminated from the ROC formula if the business spends money on those intangibles and they will be necessary for the business operation. There are intangibles like licenses, software, manufacturing agreements, etc. that would clearly fall into this category. I think Greenblatt eliminates them, though I'm not sure - it probably depends on what type of selection granularity his program has on the input side. With DIIB, you may also have some problems reconciling Canadian #'s to the US GAAP #'s - I'm not sure. As you indicate, the Greenblatt system does not consider whether the business is getting better or worse. If you look at the Piotroski score: DIIB: Positive Net Income... yes (Net Income Positive) Positive Cash Flow... yes (Cash Flow Positive) Earnings Quality... yes (Cash Flow greater than Net Income) Decreasing Debt... no (Financial Leverage Decreasing) Increasing Working Capital... no (Current Ratio Increasing) Improving Productivity... no (Asset Turnover Increasing) Growing Profitability... no (ROA Increasing) Not Issuing Stock... yes (Shares Outstanding Decreasing) Competitive Position... no (Gross Profit Margin Expanding) 4 Points The last 6 items score the business trends - 1 out of 6 - and on that score, the business does not seem to be improving. I've been thinking about a scan that incorporates those pieces of information (i.e. 'good', 'cheap', and 'improving' rather than just 'good' and 'cheap'), but I haven't done that yet. Of course, that's part of the old investment question - if a stock's cheap, do you wait to see a turnaround or do you invest expecting a turnaround. The Greenblatt system does not pay any attention to trends. It simply says buying a better business at a cheap price is good enough - you don't need to wait. Regards, Stew