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Stocks To Buy In Forbes Best Small Companies List

Every year in the fall, Forbes publishes its annual list of America's Best Small Companies: 100 public companies with sales under $1 billion.

Forbes looks for small companies with strong sales growth, expanding profit margins, and high returns on equity - the signs of a prospering, efficient business.

These are great characteristics, of course, but to consider an investment in any of these stocks we need to consider THE most important characteristic: the stock's valuation! Great, growing companies often have lofty valuations that put a lid on the returns available for new shareholders.

So how can we find the best potential investments from this list of undeniably excellent smaller businesses?

Putting the Magic in Forbes' List

To rank the stocks by relative investment-worthiness, we can use the techniques from Joel Greenblatt's Magic FormulaŽ Investing strategy - find stocks with high earnings yields (i.e., selling cheaply) combined with high returns on capital (i.e., quality businesses).

The easiest way to start is by simply seeing which of Forbes' stocks currently show up in the "official" Magic Formula screens. Currently there are 6:

Sturm Ruger & Co Inc. (RGR): #9 on Forbes' list
Anika Therapeutics Inc (ANIK): #10
Myriad Genetics Inc (MYGN): #16
Syntel Inc (SYNT): #26
Alliance Fiber Optic Products Inc (AFOP): #40
RPX Corp (RPXC): #62

Additionally, there 4 more that show up on our own Top 100 over $50 million market cap screener:

Medifast Inc. (MED): #18 on Forbes' list
SL Industries Inc. (SLI): #23
Computer Programs and Systems Inc (CPSI): #50
(IPCM): #76

That's 10 quality small cap companies that are likely selling at very attractive prices. For anyone interested in great small companies at bargain valuations, these 10 should be near the top of your research list!

The Full List

The MagicDiligence Portfolio Ranker tool allows you to enter any list of stocks and have them instantly ranked using the Magic Formula method, so I punched in the Forbes' list to see how they lined up. RPXC had to be excluded because the company actually operates at a negative invested capital when intangibles and goodwill are backed out! Here is the ranked list, from most attractive to least:

Ticker Company EarnYield ROIC EY Rank ROIC Rank Combined
Score
MYGN Myriad Genetics Inc. 11.60% 150.60% 6 8 14
ANIK Anika Therapeutics Inc. 11.70% 95.80% 5 17 22
RGR Sturm Ruger & Company Inc. 16.90% 65.20% 1 26 27
USPH U.S. Physical Therapy 8.87% 117.75% 16 13 29
SYNT Syntel Inc. 9.00% 107.60% 14 15 29
CPSI Computer Programs and Systems Inc. 8.70% 108.80% 17 14 31
MED Medifast Inc. 9.10% 79.60% 12 19 31
AFOP Alliance Fiber Optic Products Inc. 11.20% 69.50% 8 23 31
LCI Lannett Co 9.06% 79.21% 13 20 33
IPCM IPC The Hospitalist Company, Inc. 8.60% 96.30% 18 16 34
JCOM j2 Global Inc. 7.00% 161.80% 28 7 35
SLI SL Industries Inc. 14.20% 46.20% 2 37 39
MANH Manhattan Associates Inc. 4.30% 543.30% 45 1 46
EGOV NIC Inc. 5.90% 261.70% 41 5 46
NTCT NetScout Systems, Inc. 6.30% 128.20% 36 11 47
TYPE Monotype Imaging Holdings Inc. 4.90% 502.50% 49 2 51
FDS FactSet Research Systems Inc. 5.20% 351.50% 48 3 51
CYBX Cyberonics, Inc. 6.80% 72.60% 30 21 51
NATH Nathan's Famous Inc. 5.70% 140.40% 44 9 53
WINA Winmark Corporation 6.90% 68.80% 29 24 53
SWI SolarWinds Inc. 2.50% 322.50% 54 4 58
PBH Prestige Brands Holdings Inc. 5.30% 123.70% 47 12 59
ICON Iconix Brand Group, Inc. 5.90% 85.20% 41 18 59
CLFD Clearfield Inc. 6.70% 59.00% 32 27 59
CRUS Cirrus Logic Inc. 9.60% 36.40% 10 49 59
ZUMZ Zumiez Inc. 8.70% 40.30% 17 43 60
IPGP IPG Photonics Corporation 7.70% 43.70% 21 40 61
WGO Winnebago Industries Inc. 11.40% 34.50% 7 54 61
AMBA Ambarella Inc. 2.30% 181.70% 56 6 62
PLKI AFC Enterprises Inc. 4.70% 71.30% 41 22 63
CCF Chase Corporation 10.10% 33.80% 9 55 64
TYL Tyler Technologies Inc. 2.40% 130.20% 55 10 65
SNHY Sun Hydraulics Corporation 6.20% 57.40% 37 29 66
ACIW ACI Worldwide Inc. 4.60% 67.50% 42 25 67
DORM Dorman Products, Inc. 8.70% 36.30% 17 50 67
PRFT Perficient Inc. 6.90% 44.40% 29 39 68
PLT Plantronics Inc. 7.80% 36.50% 20 48 68
BGS B&G Foods 6.07% 56.74% 39 30 69
EXPO Exponent Inc. 6.50% 47.30% 33 36 69
TLF Tandy Leather Factory Inc. 13.00% 27.80% 3 66 69
SAM Boston Beer Co. 6.10% 53.70% 38 33 71
MLAB Mesa Laboratories Inc. 4.60% 56.70% 42 31 73
CMN Cantel Medical Corporation 4.10% 57.50% 46 28 74
EXLS ExlService Holdings Inc. 6.40% 43.50% 35 41 76
LOPE Grand Canyon Education, Inc. 7.50% 34.70% 23 53 76
LFUS Littelfuse Inc. 6.70% 38.00% 32 45 77
LCI Lannett Company, Inc. -101.40% 85.20% 61 18 79
LWAY Lifeway Foods Inc. 5.70% 47.80% 44 35 79
CVLT CommVault Systems, Inc. 4.10% 51.70% 46 34 80
PRLB Proto Labs 3.87% 55.62% 49 32 81
POWI Power Integrations Inc. 4.50% 45.50% 43 38 81
THRM Gentherm Inc. 6.20% 38.40% 37 44 81
FWRD Forward Air Corp 6.47% 37.87% 34 47 81
MTSC MTS Systems Corporation 7.10% 30.50% 27 58 85
BRLI Bio - Reference Laboratories Inc. 9.00% 25.10% 14 72 86
OMCL Omnicell, Inc. 4.40% 37.90% 44 46 90
SLCA U.S. Silica Holdings 7.32% 27.69% 24 67 91
EPAM EPAM Systems 3.84% 41.99% 50 42 92
STMP Stamps.com Inc. 4.70% 36.00% 41 51 92
TRNS Transcat, Inc. 7.60% 25.70% 22 70 92
CMT Core Molding Technologies, Inc. 12.10% 14.60% 4 88 92
MEI Methode Electronics Inc. 6.40% 30.00% 35 59 94
LABL Multi-Color Corporation 6.50% 29.50% 33 61 94
AZZ AZZ incorporated 6.50% 28.80% 33 63 96
JBSS John B. Sanfilippo & Son Inc. 9.30% 14.70% 11 87 98
SGC Superior Uniform Group Inc. 8.40% 17.30% 19 80 99
MNTX Manitex International Inc. 8.60% 16.60% 18 81 99
IRBT iRobot Corporation 5.20% 35.60% 48 52 100
AIMC Altra Holdings, Inc. 7.20% 23.70% 26 75 101
ESYS Elecsys Corporation 5.90% 29.00% 41 62 103
KWR Quaker Chemical Corporation 6.80% 24.30% 30 74 104
TNC Tennant Company 5.30% 30.50% 47 58 105
ATRO Astronics Corporation 5.60% 29.80% 45 60 105
VRTU Virtusa Corporation 4.70% 28.60% 41 64 105
BCPC Balchem Corporation 3.00% 31.70% 52 56 108
MNRO Monro Muffler Brake Inc. 5.80% 28.20% 43 65 108
TAX JTH Holding Inc. D/B/A Liberty Tax Service 6.00% 27.50% 40 68 108
NEOG Neogen Corporation 3.00% 31.10% 52 57 109
PRAA Portfolio Recovery Associates 7.23% 15.74% 25 84 109
SNCR Synchronoss Technologies, Inc. 2.70% 30.00% 53 59 112
SHLO Shiloh Industries Inc. 7.80% 11.90% 20 92 112
AIRM Air Methods Corp 6.79% 16.31% 31 82 113
JJSF J & J Snack Foods Corp. 5.60% 27.10% 45 69 114
UEIC Universal Electronics Inc. 4.60% 23.50% 42 76 118
FARO FARO Technologies, Inc. 4.80% 25.20% 50 71 121
CGNX Cognex Corporation 3.90% 24.70% 48 73 121
ACET Aceto Corporation 5.20% 21.60% 48 77 125
CVGW Calavo Growers, Inc. 4.90% 21.30% 49 78 127
MG MISTRAS Group Inc. 4.80% 16.60% 50 81 131
CVCO Cavco Industries Inc. 5.50% 15.70% 46 85 131
CHDN Churchill Downs Incorporated 4.70% 13.80% 41 90 131
SNAK The Inventure Group, Inc. 4.50% 13.90% 43 89 132
EXP Eagle Materials Inc. 4.00% 14.60% 47 88 135
ELLI Ellie Mae Inc. 1.80% 19.90% 57 79 136
CGI Celadon Group 5.81% 7.65% 42 94 136
LNDC Landec Corporation 5.50% 13.40% 46 91 137
DDD 3D Systems Corporation 1.10% 15.90% 59 83 142
FTNT Fortinet, Inc. 1.60% 15.60% 58 86 144
CHUY Chuy's Holdings Inc. 3.50% 11.60% 51 93 144
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