23 Magic Formula Stocks on Forbes' Top 200 Small Companies List

by: MagicDiligence

Every year, Forbes creates a list of the top 200 best small companies in America. To be eligible for the list, a company must have annual revenue between $5 and $750 million, be publicly traded for at least a year, and have a stock price of at least $5. The rankings are done based on earnings growth, sales growth, and return on equity. Forbes has found that this group of stocks has outperformed the benchmark Russell 2000 of small stocks by about 10% annually.

This list is especially interesting for Magic Formula investors, as a staple of MFI is purchasing small-cap stocks, which are often under-followed and thus inefficiently priced in the market. Taking the Forbes list and pulling out the current Magic Formula stocks could find us some attractive investment ideas from the number of declining businesses or cyclical entities on the screen. Here is a table of current MFI stocks that appear in the top 200 list:

Company Ticker Forbes
Deckers Outdoor DECK 30 Consumer products, maker of UGG boots and Teva sports sandals.
InterDigital IDCC 19 Cellular and wireless technologies for mobile devices.
j2 Global Communications JCOM 63 Messaging and communications services to businesses.
Pre-Paid Legal PPD 66 Sells "legal insurance" to individuals and families.
Tekelec TKLC 162 Cellular services, including number portability and mobile messaging.

In addition to these current opportunities, the Magic Formula screen has presented investors with an opportunity to purchase many of the top 200 at attractive valuations at some point in 2009. This further illustrates the value of the technique - finding great stocks at cheap prices, no matter how big or small the company. Below are stocks in the top 200 list that appeared in the MFI screens at some point in 2009 (taking out the current ones above). Also included is an estimate of the current Magic Formula statistics for each. Some of these are still quite cheap - anything with an earnings yield over 11-12% and a return on capital number over 100% is an attractive investment candidate.

Company Ticker Forbes Rank EY ROIC Description
Almost Family AFAM 25 15.9% 172.1% Home health and nursing services.
American Reprographics ARP 152 10.8% 32.9% Document management for construction industry.
Bolt Technologies BOLT 62 23.6% 61.0% Marine seismic data for oil and gas industry.
Computer Task Group CTGX 131 10.3% 31.1% IT outsourcing provider.
Darling International DAR 154 8.3% 30.0% Rendering food waste into usable products.
Dolby Labs DLB 11 8.5% 104.0% Audio technology licensing.
Forrester Research FORR 160 10.8% 130.1% Technology industry research.
K-Tron KTII 75 12.7% 60.1% Industrial components and parts.
LHC Group LHCG 4 14.6% 124.0% Home-based healthcare and nursing services.
Liquidity Services LQDT 88 21.3% 382.7% Online auction marketplace for unwanted items.
Middleby MIDD 22 9.5% 115.8% Restaurant equipment such as fryers and ice boxes.
Nathan's Famous NATH 119 10.4% 64.2% Fast food restaurants.
NutriSystem NTRI 45 8.2% 166.2% Weight loss products.
Obagi Medical OMPI 106 6.4% 48.2% Prescription skin-care products.
Perficient PRFT 114 1.9% 13.4% IT consulting.
PetMed Express PETS 15 11.8% 122.7% Online pet medical supplies.
PROS Holdings PRO 42 5.7% 183.0% Pricing strategy software.
QLogic QLGC 187 5.7% 59.0% Computer data storage network components.
Volcom VLCM 121 10.5% 29.2% Alternative sports apparel retail.