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Updated daily. All values annualized from Jan. 2008.

From Lehman Brother's collapse on September 15th, 2008, until March 9th of this year, the S&P 500 and stocks in general were in a massive free fall seldom witnessed in the market's history. The SPY S&P 500 ETF closed at 68.11 on that day, its lowest point since September of 1996! Since then, the market has rebounded strongly, and SPY is up an impressive 46%, closing last Friday at 95.08. Consumer confidence has improved, housing is showing signs of stabilization, banks are again reporting profits, and overall the worst appears to be behind us.

Nearly all investors have performed well, but Magic Formula investors in particular have really benefited, especially those that focus on small cap picks. This makes sense, of course. Small cap, value based stocks are the best performing class of stocks over the history of the market. The inherent volatility in small cap stocks provides investors ample opportunity to buy them at a discount, and in market downturns these stocks get significantly cheaper than the perceived "safer" large-cap companies. Of course, a low stock price more than mitigates these "risks", in many cases.

Those brave enough to buy have been handsomely rewarded in just 3 months. I recently looked at the Top 100 MFI stocks over 50 million market cap for March 9th and how they had performed individually and in aggregate during the market rebound (using the MFI History tool available to MagicDiligence Members). The results were quite impressive. The screen in aggregate shows a 77% average increase for all 100 stocks, which crushes the S&P's appreciation by a phenomenal 31%. Possibly even more impressive is that fully 27 of those stocks have doubled in value over the last 90 days - several tripling in value and one, CTC Media (CTCM), quadrupling your money! (I predicted a possible 5 bagger but with high risk) What's more, 10 additional stocks showed gains of 80-99%. The list below shows all of the 2, 3, and 4 baggers. This is proof that big gains don't always have to be tied to big revenue growth, as many of these stocks have not shown any significant rebound in business results yet. This pushes through a point I stress here a lot - cheap stocks can provide an investor with profits even without outstanding business results. Expensive stocks can provide an investor with losses even with outstanding business results.

The large cap screen for March 9 (top 50 over 2 billion market cap) performed well also, delivering an average 52% gain per pick, but that's just 6% better than the S&P overall. Only one stock doubled (Coach - COH - appreciated 122%), although 7 delivered 80% gains or better. MagicDiligence's research has confirmed what Joel Greenblatt reports in The Little Book that Beats the Market... including small cap stocks in your MFI portfolio greatly improves returns, on average.

Here are the MFI Stocks doubling or better since March 9, 2009. Several have public reviews and many of those not linked have reviews available to members.

CTC Media (CTCM) - up 357%
Kenexa (KNXA) - up 236%
American Repographics (ARP) - up 235%
iGate (IGTE) - up 198%
Bare Escentuals (BARE) - up 197%
True Religion (TRLG) - up 180%
Interval Leisure (IILG) - up 164%
Expedia (EXPE) - up 163%
Monotype Imaging (TYPE) - up 161%
Meredith Publishing (MDP) - up 157%
Herbalife (HLF) - up 154%
GrafTech (GTI) - up 144%
Deluxe (DLX) - up 136%
Heartland Payment Systems (HPY) - up 134%
Dice Holdings (DHX) - up 126%
Mesabi Trust (MSB) - up 126%
Joy Global (JOYG) - up 125%
Coach (COH) - up 123%
Qiao Xing Mobile (QXM) - up 120%
Gymboree (GYMB) - up 117%
Monster Worldwide (MWW) - up 117%
WABCO Holdings (WBC) - up 114%
Volcom (VLCM) - up 111%
Innophos Holdings (IPHS) - up 109%
Ticketmaster (TKTM) - up 106%
PROS Holdings (PRO) - up 104%
VASCO Data Security (VDSI) - up 101%

Many of these will continue to be volatile stocks and may not hold on to their gains, while others were grossly undervalued and may even appreciate more. The Magic Formula is proving to be an excellent source to find undervalued but strong companies poised to deliver outstanding gains to investors.

Disclosure: Steve owns COH

Calculate Magic Formula statistics for any stock with the MFI Stats Calculator tool.

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Comments

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Posted by cookedc on 2009-06-18 21:09:44

Steve,

A very interesting article. Thanks for compiling this information. So, now we know what to do the next time the market tanks and all looks hopeless: Sell all our stocks that have held up relatively well, then take that money and plow it into at least 20 small caps from the MFI screen.

David

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