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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:

CompanyTickerForbes
Rank
Description
Deckers OutdoorDECK30Consumer products, maker of UGG boots and Teva sports sandals.
InterDigitalIDCC19Cellular and wireless technologies for mobile devices.
j2 Global CommunicationsJCOM63Messaging and communications services to businesses.
Pre-Paid LegalPPD66Sells "legal insurance" to individuals and families.
TekelecTKLC162Cellular 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.

CompanyTickerForbes RankEYROICDescription
Almost FamilyAFAM2515.9%172.1%Home health and nursing services.
American ReprographicsARP15210.8%32.9%Document management for construction industry.
Bolt TechnologiesBOLT6223.6%61.0%Marine seismic data for oil and gas industry.
Computer Task GroupCTGX13110.3%31.1%IT outsourcing provider.
Darling InternationalDAR1548.3%30.0%Rendering food waste into usable products.
Dolby LabsDLB118.5%104.0%Audio technology licensing.
Forrester ResearchFORR16010.8%130.1%Technology industry research.
K-TronKTII7512.7%60.1%Industrial components and parts.
LHC GroupLHCG414.6%124.0%Home-based healthcare and nursing services.
Liquidity ServicesLQDT8821.3%382.7%Online auction marketplace for unwanted items.
MiddlebyMIDD229.5%115.8%Restaurant equipment such as fryers and ice boxes.
Nathan's FamousNATH11910.4%64.2%Fast food restaurants.
NutriSystemNTRI458.2%166.2%Weight loss products.
Obagi MedicalOMPI1066.4%48.2%Prescription skin-care products.
PerficientPRFT1141.9%13.4%IT consulting.
PetMed ExpressPETS1511.8%122.7%Online pet medical supplies.
PROS HoldingsPRO425.7%183.0%Pricing strategy software.
QLogicQLGC1875.7%59.0%Computer data storage network components.
VolcomVLCM12110.5%29.2%Alternative sports apparel retail.


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