Saturday, January 14, 2006

Two picks from Greenblatt's Magic Formula

As I mentioned before, I'm not willing to chuck all the research that I do to follow Mr. Greenblatt into the promised land. But I'm not willing to dismiss his high ROC/high earnings yield formula, either. Here are two stocks that I find interesting that pop up at

Holly (HOC) is an independent refiner ($2B market cap). It processes heavy crude and has had very strong spreads in recent years. Basically, the bet here is that spreads will stay wide and HOC might eventually be taken over by a giant like VLO. Here's a presentation if you're interested.

Hewitt Associates (HEW) is a business services co., another midcap ($3B). What intrigues me here is that HEW is the leader in HR BPO, that is Human Resources Business Process Outsourcing. HR BPO is an area that is expected to grow smartly over the next five years. Just think about all of the administrative tasks that your HR dept performs at work. Could someone else perform those tasks better and at lower cost? I think so. HEW grew its HR BPO business significantly through it's acquisition about 1.5 years ago of Exult. Right now, HEW's business is roughly 2/3 HR BPO and 1/3 consulting services. The problem is that the HR BPO unit is growing faster than consulting and carries lower margins (results in lowering of corporate margins). HEW management thinks this will be alleviated as the HR BPO long-term contracts mature. The stock hasn't really done anything for years, but based on HR BPO demand and increasing (hopefully) margins here, HEW is worth a look. I'm looking for sub $25.


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