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Ranking the Forbes Best Small Companies List

One of the key attractive points of Magic Formula Investing (MFI) is its inclusion of small-cap stocks. In fact, it is this point that was one of the main reasons for MFI's enduring ability to outperform the market. Greenblatt's strategy worked fine for stocks over $1 billion market cap, returning 20% annually between 1988-2004 (as shown in The Little Book that Beats the Market). But when you expanded the universe of stocks to include all stocks over a $50 million market cap, the performance vastly improved, returning nearly 31% annually over the same period!

In fact, study after study has confirmed that small-caps outperform the large-caps as a group over the long run. And there are many other arguments to own them in your portfolio. Yet, investment banks, money managers, TV pundits, and research firms generally ignore them.

So, where can we go to find good small-cap ideas? MFI is certainly one place. Perhaps the most intriguing list of small-cap companies is produced every fall by Forbes, in their best small companies list. This year, Forbes editors picked 100 publicly traded companies with sales under $1 billion and a stock price above $5, filtering out firms with accounting and/or legal troubles. Then, they ranked those stocks based on an unspecified recipe including earnings growth, sales growth, and returns on equity. The result is a universe of what I found to be very intriguing small-cap companies.

I thought it would be interesting to apply the Magic Formula ranking system of earnings yield and return on adjusted capital to see which of these firms best met the "great companies at cheap prices" goal of MFI. Below are the rankings. One stock, Portfolio Recovery Associates (PRAA), has an asset-based business model (like a bank or insurance company), and was excluded. Entries with an asterisk (*) currently appear in the official MFI screens. The statistics here were calculated using the MFI stats calculator tool.

RankCompanyForbes RkTickerEYROICEY RkROIC RkMFI Score
1*InterDigital2IDCC20.30%224.20%336
2*Pre-Paid Legal Services78PPD18.30%160.50%71118
3*LHC Group43LHCG19.60%117.90%51722
4*Capella Education19CPLA12.00%202.30%18725
5*Strayer Education14STRA12.00%177.70%18826
6*PetMed Express82PETS12.00%123.70%181634
7True Religion Apparel9TRLG21.00%67.70%23436
8American Public Education3APEI10.70%142.20%261238
9*j2 Global Communications89JCOM9.60%164.50%301040
10Iconix Brand Group44ICON11.10%116.40%241842
11*Sturm, Ruger73RGR17.50%65.50%83745
12Insituform Technologies62INSU23.40%55.10%14647
13*Buckle75BKE13.50%63.40%123951
14National Presto Industries7NPK15.30%61.50%114152
15Volterra Semicondutor55VLTR8.30%125.20%381553
16Hittite Microwave18HITT7.70%135.50%441357
17NutriSystem6NTRI8.30%111.40%381957
18Allegiant Travel33ALGT12.90%55.60%144559
19Deckers Outdoor4DECK9.80%72.60%293160
20UFP Technologies12UFPT19.70%45.90%45660
21DG FastChannel71DGIT9.50%70.00%323264
22Medifast1MED8.50%81.70%372865
23Hawkins60HWKN12.40%54.60%164965
24Tempur-Pedic International15TPX7.50%100.70%462268
25NCI93NCIT11.20%55.10%234669
26Liquidity Services79LQDT5.80%168.10%62971
27Inter Parfums96IPAR11.40%53.40%225173
28Synaptics81SYNA8.60%64.00%363874
29Ansys63ANSS5.10%322.50%74175
30FactSet Research Systems40FDS5.40%212.90%69675
31TransDigm Group21TDG6.70%103.30%542175
32VSE27VSEC19.50%36.00%66975
33Middleby68MIDD6.90%83.60%512778
34Industrial Services of America8IDSA15.80%35.50%107080
35iRobot16IRBT8.10%60.70%404282
36Quality Systems22QSII4.60%219.90%79483
37Citi Trends94CTRN16.90%31.20%97483
38Syntel38SYNT6.90%67.80%513384
39Dolby Laboratories17DLB5.60%104.60%652085
40NIC92EGOV4.30%218.30%82587
41Morningstar70MORN5.00%127.40%751489
42Darling International59DAR9.60%42.10%306090
43Hibbett Sporting Goods65HIBB8.90%44.40%345791
44MSCI97MSCI3.30%238.40%90292
45Jos. A. Bank Clothiers48JOSB8.10%48.20%405393
46Blackbaud54BLKB5.40%85.50%692695
47AAON77AAON9.50%38.60%326799
48GSI Technology69GSIT11.80%29.20%217899
49Ensign Group52ENSG13.50%23.40%128799
50LoopNet20LOOP4.90%96.90%7723100
51Sirona Dental Systems53SIRO5.20%78.10%7129100
52Lumber Liquidators32LL8.70%39.00%3565100
53Meridian Bioscience98VIVO5.20%73.70%7130101
54Raven Industries87RAVN6.80%54.90%5348101
55Steve Madden34SHOO8.00%41.20%4261103
56Wright Express72WXS7.60%42.50%4559104
57Atwood Oceanics39ATW12.80%21.50%1589104
58Interactive Intelligence26ININ4.40%92.30%8124105
59KMG Chemicals35KMGB12.10%22.70%1788105
60LMI Aerospace46LMIA11.10%24.70%2484108
61Allscripts Healthcare Solutions41MDRX3.80%87.80%8625111
62Balchem24BCPC5.20%62.60%7140111
63Dionex86DNEX5.50%55.70%6744111
64Thoratec58THOR6.00%54.50%6150111
65Boston Beer51SAM6.20%47.20%6055115
66Quaker Chemical 66KWR10.60%19.70%2790117
67NetScout Systems57NTCT5.00%59.50%7543118
68Bio-Reference Laboratories50BRLI7.30%33.60%4771118
69United States Lime & Minerals88USLM10.60%19.60%2791118
70HMS Holdings25HMSY3.80%65.60%8636122
71ExlService Holdings47EXLS5.60%40.60%6562127
72ICF International76ICFI6.30%36.40%5968127
73Heico95HEI5.80%38.90%6266128
74NVE45NVEC7.20%28.70%4881129
75Integra LifeSciences91IART6.40%31.90%5773130
76Red Hat84RHT1.60%67.60%9835133
77Monro Muffler Brake83MNRO6.40%29.80%5777134
78WMS Industries99WMS6.70%28.00%5482136
79Air Methods85AIRM7.90%16.30%4393136
80Buffalo Wild Wings64BWLD6.50%25.20%5683139
81Dril-Quip49DRQ5.80%29.10%6279141
82Neogen74NEOG3.60%47.40%8954143
83Atlantic Tele-Network67ATNI7.20%13.20%4895143
84Transcend Services10TRCR2.80%52.80%9252144
85Skyworks Solutions61SWKS4.00%39.20%8463147
86GeoResources13GEOI7.10%11.20%5099149
87F5 Networks29FFIV2.40%44.10%9458152
88II-VI100IIVI5.50%24.60%6785152
89Quidel42QDEL4.70%30.60%7875153
90WebMD Health5WBMD2.10%39.20%9563158
91Sapient36SAPE3.30%32.90%9072162
92Under Armour28UA4.20%28.90%8380163
93Concur Technologies37CNQR1.60%30.50%9876174
94Continental Resources23CLR4.50%16.10%8094174
95InnerWorkings30INWK4.00%16.70%8492176
96Akamai Technologies31AKAM2.50%24.60%9385178
97T-3 Energy Services80TTES3.80%12.40%8697183
98Zumiez90ZUMZ2.10%13.10%9596191
99Rackspace Hosting11RAX1.80%12.10%9798195
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