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Over the next few weeks, MagicDiligence will be putting together a series of articles chronicling the performance of the Magic Formula® Investing (MFI) strategy in 2013. We'll begin by reviewing the 5 best performing stocks in the strategy in this article, then looking at the 5 worst performing stocks in 2013. After the new year, we will review both MFI andMagicDiligence's Top Buy picks performance overall for the year. All results here are from the "top 50 stocks over 50 million market cap" from the official screens.

Maybe we can learn from this year's results, improving our picks for 2014!

Best Performing Stocks in 2013

2013 has been a good year for stocks, and a good year for the MFI strategy as well. Of the 127 distinct stocks to come through the screen this year, 10 of them had their stock price double or better. So far, about 75% of the stocks appearing in the screen have outperformed the S&P 500.

Here are the 5 biggest winners and some comments on why they did so well...

Spirit Airlines (NASDAQ:SAVE) +136% from Jan. 7

I have to admit, with its nickel-and-dime charging structure, bare-bones customer experience, and the horrible investing track record of airlines, I was never a big fan of SAVE. But the stock has done extremely well, skyrocketing from about $18 at the beginning of the year to $43 today. The allure of cheap flights continues to resonate with consumers, add-on charges be damned, and with the recentmerger of American and US Airways, Spirit's niche should be even more in demand.

The Lesson: Don't over-think the numbers. Spirit was (and is) growing revenues at over 30% rates, had a believable and aggressive expansion plan, and was qualitatively cheap at an earnings yield of over 15% (P/E of 10). Growth for cheap is golden, and it is hard to predict consumer behavior.

Capella Education (NASDAQ:CPLA) +137% from Jan. 30

No sector in MFI has been as beaten down as the for-profit education stocks. Declining enrollments, new government regulations, a bad rep for "churning and burning" students, and persistently high unemployment have burned the sector's stocks badly ever since 2010. The market hated them so much that valuations had gotten absurd - in January, Capella's earnings yield was above 25%! Now that enrollment seems to have stabilized at Capella, the market has bid it back up to a reasonable valuation.

The Lesson: Really high earnings yields, aside from special cases like one-time revenue events or suspected frauds, usually lead to good results. Particularly with firms like Capella that have always been profitable and financially conservative (CPLA has no debt).

ITT Education (NYSE:ESI) +160% from Apr. 3

ITT is almost a carbon copy of Capella, except that its valuation got beat down to an even more absurd level - it carried a 40% earnings yield as recently as April! Even today, after nearly tripling from its sub-$12 low, it carries a cheap earnings yield of over 17%. New student enrollment has even rebounded into positive territory here, while the firm remains profitable and carries a strong balance sheet.

The Lesson: Same as for CPLA. A ridiculously high earnings yield on an ongoing profitable and financially healthy company is usually a recipe for success.

GT Advanced Technologies (NASDAQ:GTAT) +191% from Mar. 6

It has been a roller-coaster year for GT Advanced, with the stock ranging from under $3 to almost $11! The company has good management that actively steered the firm away from now-extinct direct solidification system (DSS) furnaces for producing solar cells into the more widely applicable polysilicon and sapphire lines of business. A recent deal with Apple (AAPL) for sapphire production has taken a lot of risk out of the stock.

The Lesson: This was another stock with an outrageous earnings yield at its peak, but was never in trouble financially and was actively moving into better business verticals. Good management goes a long way, and this company has always been well-run. We held this as a selection for much of the year.

Nu Skin (NYSE:NUS) +228% from Feb. 27

Nu Skin always had a great profile: excellent revenue growth (15-20%), strengthening margins, share buybacks, a plus-2% dividend yield at under a 20% payout ratio, and a strong balance sheet. The stock got beat down into the $30's as collateral damage from Bill Ackman's short attack on Herbalife (HLF) and the multi-level marketing business model. These attacks seem to come around every couple of years, and they have almost without exception been great MFI buying opportunities. I will say, however, that I never expected Nu Skin to soar into the $120's, and the stock looks overvalued today.

The Lesson: Nu Skin was another 2013 pick, although we did sell short of its highs. Like SAVE and several other great performing Magic Formula stocks this year, Nu Skin had the profile of a growth-at-a-reasonable-price company with no other significant red flags, and filled its promise in spades.

Source: Top 5 Best Performing Stocks Of Magic Formula Investing In 2013