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Here's A Quick and Easy Way to Find Great Magic Formula Stocks

For me, one of the more interesting passages in Joel Greenblatt's The Little Book that Beats the Market was when he recounts something he used to do as a professor at Columbia.

He talks about how he would take today's newspaper to the podium (this was back before the days of the Internet, apparently) and ask any student to blurt out a stock symbol or company name. He would then look up the 52-week trading range of the company's stock and challenge the students on how the value of all these companies - particularly large, established companies - can change so dramatically in the course of just one year?

It is true even today. Look at Microsoft (MSFT), one of the most stable, predictable companies in the entire world. It has a 52-week low of $30.84 and a 52-week high of $41.66, a 35% gap. Stodgy defense contractor Northrop Grumman (NOC) has a wide 58% gap!

The 52-week range gets even wider as you dip into more lightly traded and smaller companies. Consider Magic Formula® Investing (MFI) stocks Higher One (ONE), with its 229% 52-week gap, or Liquidity Services (LQDT) with a 239% valuation gap in just 12 months!

Scraping the Bottom: Stocks Near a 52-Week Low

We can use the 52-week range to identify potentially interesting opportunities in the MFI screens in 2 ways.

First, we can scan the screens for stocks trading very close to their 52-week low. This could highlight some stocks that have sold off so far that they are reaching a bottom and are ripe for a rebound in their stock price. This approach is especially useful for larger companies with established businesses and competitive advantages that make a complete meltdown of the business unlikely.

Here are the 10 Magic Formula stocks trading closest to their 52-week lows (as of 5/21):

1) Coach (COH) - 0.6% above 52-week low
2) Bed Bath and Beyond (BBBY) - +1.8%
3) Express (EXPR) - +3.0%
4) (SPRT) - +3.7%
5) King Digital (KING) - +5.4%
6) Dice Holdings (DHX) - +6.5%
7) Neustar (NSR) - +6.6%
8) Travelzoo (TZOO) - +7.5%
9) CA (CA) - +7.7%
10) The Buckle (BKE) - +9.3%

There are some interesting names on that list. Coach and Bed Bath and Beyond are both large, well-known, established companies with track records of success, well-regarded management, and strong financial footing. CA is a tech stalwart with a very stable record of earnings and cash flows. There are also some firms in that list with substantial revenue growth potential, such as KING and SPRT.

Shooting Stars: Stocks With Big Upside Potential

The second way to use the 52-week range is to identify stocks trading at the largest discount to their 52-week high price.

This is what I call the "shooting star" list. Oftentimes these are volatile stocks that the market once loved but now shuns. However, if those positive attributes can be reclaimed, there is no reason the market may not love the stock once again. Here's the 10 MFI stocks trading farthest under their 52-week high:

1) Higher One Holdings (ONE) - 66.3% below 52-week high
2) (SPRT) - -64.5%
3) Liquidity Services (LQDT) - -64.3%
4) Neustar (NSR) - -54.8%
5) Nu Skin (NUS) - -48.4%
6) Travelzoo (TZOO) - -46.1%
7) ITT Education (ESI) - -44.6%
8) Express (EXPR) - -43.6%
9) Blucora (BCOR) - -37.1%
10) GameStop (GME) - -36.9%

I've written about several of these recently, and a few others are on our current Top Buys list. On the other hand, a few of these companies have faced some significant and possibly permanent adverse developments in their core business and investors should tread carefully (LQDT and NSR in particular). Notice also that several of these overlap the 52-week low list, which is not unusual (NSR, TZOO, SPRT, etc.)

The 52 Week Range Is A Quick and Easy Filter

While not always a perfect indicator, the 52-week range is a quick and easy way to find potential attractively valued stocks within MFI, either by comparing stable, larger firms against their 52-week low, or more volatile stocks against their 52-week high.

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