Login
Site Policies

  Tweet

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.

Rank	Company	Forbes Rk	Ticker	EY	ROIC	EY Rk	ROIC Rk	MFI Score
1	*InterDigital	2	IDCC	20.30%	224.20%	3	3	6
2	*Pre-Paid Legal Services	78	PPD	18.30%	160.50%	7	11	18
3	*LHC Group	43	LHCG	19.60%	117.90%	5	17	22
4	*Capella Education	19	CPLA	12.00%	202.30%	18	7	25
5	*Strayer Education	14	STRA	12.00%	177.70%	18	8	26
6	*PetMed Express	82	PETS	12.00%	123.70%	18	16	34
7	True Religion Apparel	9	TRLG	21.00%	67.70%	2	34	36
8	American Public Education	3	APEI	10.70%	142.20%	26	12	38
9	*j2 Global Communications	89	JCOM	9.60%	164.50%	30	10	40
10	Iconix Brand Group	44	ICON	11.10%	116.40%	24	18	42
11	*Sturm, Ruger	73	RGR	17.50%	65.50%	8	37	45
12	Insituform Technologies	62	INSU	23.40%	55.10%	1	46	47
13	*Buckle	75	BKE	13.50%	63.40%	12	39	51
14	National Presto Industries	7	NPK	15.30%	61.50%	11	41	52
15	Volterra Semicondutor	55	VLTR	8.30%	125.20%	38	15	53
16	Hittite Microwave	18	HITT	7.70%	135.50%	44	13	57
17	NutriSystem	6	NTRI	8.30%	111.40%	38	19	57
18	Allegiant Travel	33	ALGT	12.90%	55.60%	14	45	59
19	Deckers Outdoor	4	DECK	9.80%	72.60%	29	31	60
20	UFP Technologies	12	UFPT	19.70%	45.90%	4	56	60
21	DG FastChannel	71	DGIT	9.50%	70.00%	32	32	64
22	Medifast	1	MED	8.50%	81.70%	37	28	65
23	Hawkins	60	HWKN	12.40%	54.60%	16	49	65
24	Tempur-Pedic International	15	TPX	7.50%	100.70%	46	22	68
25	NCI	93	NCIT	11.20%	55.10%	23	46	69
26	Liquidity Services	79	LQDT	5.80%	168.10%	62	9	71
27	Inter Parfums	96	IPAR	11.40%	53.40%	22	51	73
28	Synaptics	81	SYNA	8.60%	64.00%	36	38	74
29	Ansys	63	ANSS	5.10%	322.50%	74	1	75
30	FactSet Research Systems	40	FDS	5.40%	212.90%	69	6	75
31	TransDigm Group	21	TDG	6.70%	103.30%	54	21	75
32	VSE	27	VSEC	19.50%	36.00%	6	69	75
33	Middleby	68	MIDD	6.90%	83.60%	51	27	78
34	Industrial Services of America	8	IDSA	15.80%	35.50%	10	70	80
35	iRobot	16	IRBT	8.10%	60.70%	40	42	82
36	Quality Systems	22	QSII	4.60%	219.90%	79	4	83
37	Citi Trends	94	CTRN	16.90%	31.20%	9	74	83
38	Syntel	38	SYNT	6.90%	67.80%	51	33	84
39	Dolby Laboratories	17	DLB	5.60%	104.60%	65	20	85
40	NIC	92	EGOV	4.30%	218.30%	82	5	87
41	Morningstar	70	MORN	5.00%	127.40%	75	14	89
42	Darling International	59	DAR	9.60%	42.10%	30	60	90
43	Hibbett Sporting Goods	65	HIBB	8.90%	44.40%	34	57	91
44	MSCI	97	MSCI	3.30%	238.40%	90	2	92
45	Jos. A. Bank Clothiers	48	JOSB	8.10%	48.20%	40	53	93
46	Blackbaud	54	BLKB	5.40%	85.50%	69	26	95
47	AAON	77	AAON	9.50%	38.60%	32	67	99
48	GSI Technology	69	GSIT	11.80%	29.20%	21	78	99
49	Ensign Group	52	ENSG	13.50%	23.40%	12	87	99
50	LoopNet	20	LOOP	4.90%	96.90%	77	23	100
51	Sirona Dental Systems	53	SIRO	5.20%	78.10%	71	29	100
52	Lumber Liquidators	32	LL	8.70%	39.00%	35	65	100
53	Meridian Bioscience	98	VIVO	5.20%	73.70%	71	30	101
54	Raven Industries	87	RAVN	6.80%	54.90%	53	48	101
55	Steve Madden	34	SHOO	8.00%	41.20%	42	61	103
56	Wright Express	72	WXS	7.60%	42.50%	45	59	104
57	Atwood Oceanics	39	ATW	12.80%	21.50%	15	89	104
58	Interactive Intelligence	26	ININ	4.40%	92.30%	81	24	105
59	KMG Chemicals	35	KMGB	12.10%	22.70%	17	88	105
60	LMI Aerospace	46	LMIA	11.10%	24.70%	24	84	108
61	Allscripts Healthcare Solutions	41	MDRX	3.80%	87.80%	86	25	111
62	Balchem	24	BCPC	5.20%	62.60%	71	40	111
63	Dionex	86	DNEX	5.50%	55.70%	67	44	111
64	Thoratec	58	THOR	6.00%	54.50%	61	50	111
65	Boston Beer	51	SAM	6.20%	47.20%	60	55	115
66	Quaker Chemical	66	KWR	10.60%	19.70%	27	90	117
67	NetScout Systems	57	NTCT	5.00%	59.50%	75	43	118
68	Bio-Reference Laboratories	50	BRLI	7.30%	33.60%	47	71	118
69	United States Lime & Minerals	88	USLM	10.60%	19.60%	27	91	118
70	HMS Holdings	25	HMSY	3.80%	65.60%	86	36	122
71	ExlService Holdings	47	EXLS	5.60%	40.60%	65	62	127
72	ICF International	76	ICFI	6.30%	36.40%	59	68	127
73	Heico	95	HEI	5.80%	38.90%	62	66	128
74	NVE	45	NVEC	7.20%	28.70%	48	81	129
75	Integra LifeSciences	91	IART	6.40%	31.90%	57	73	130
76	Red Hat	84	RHT	1.60%	67.60%	98	35	133
77	Monro Muffler Brake	83	MNRO	6.40%	29.80%	57	77	134
78	WMS Industries	99	WMS	6.70%	28.00%	54	82	136
79	Air Methods	85	AIRM	7.90%	16.30%	43	93	136
80	Buffalo Wild Wings	64	BWLD	6.50%	25.20%	56	83	139
81	Dril-Quip	49	DRQ	5.80%	29.10%	62	79	141
82	Neogen	74	NEOG	3.60%	47.40%	89	54	143
83	Atlantic Tele-Network	67	ATNI	7.20%	13.20%	48	95	143
84	Transcend Services	10	TRCR	2.80%	52.80%	92	52	144
85	Skyworks Solutions	61	SWKS	4.00%	39.20%	84	63	147
86	GeoResources	13	GEOI	7.10%	11.20%	50	99	149
87	F5 Networks	29	FFIV	2.40%	44.10%	94	58	152
88	II-VI	100	IIVI	5.50%	24.60%	67	85	152
89	Quidel	42	QDEL	4.70%	30.60%	78	75	153
90	WebMD Health	5	WBMD	2.10%	39.20%	95	63	158
91	Sapient	36	SAPE	3.30%	32.90%	90	72	162
92	Under Armour	28	UA	4.20%	28.90%	83	80	163
93	Concur Technologies	37	CNQR	1.60%	30.50%	98	76	174
94	Continental Resources	23	CLR	4.50%	16.10%	80	94	174
95	InnerWorkings	30	INWK	4.00%	16.70%	84	92	176
96	Akamai Technologies	31	AKAM	2.50%	24.60%	93	85	178
97	T-3 Energy Services	80	TTES	3.80%	12.40%	86	97	183
98	Zumiez	90	ZUMZ	2.10%	13.10%	95	96	191
99	Rackspace Hosting	11	RAX	1.80%	12.10%	97	98	195

A MagicDiligence Membership gives you full access to the best stocks that Magic Formula Investing has to offer. Professional quality research, formal stock recommendations, timely updates, and exclusive investing tools are all at your fingertips, at one of the lowest prices in the entire investment world. Click here to learn more!

Comments

Login to Post A New Comment:

Username:
Password:

   Create a free account