MagicDiligence's  Instablog

As promised in the 2012 review article, we'll recap the 5 individual best and worst performing stocks of Magic Formula® Investing (MFI) in 2012, along with some comments on each. The idea here is to try and identify any trends or lessons we can take from these individual stocks and apply to picking stocks from the screen going forward.

In this article, we'll cover the 5 best performing stocks of MFI in 2012. With no further ado...

5) LML Payment Systems (LMLP) - 98% gain from week 24

In our review, we pegged LML worth about $3 a share, about where it was trading at the time. Subsequently, the stock fell to under $2 before receiving a buyout bid from Digital River (DRIV) for $3.45/share, leading to this big gain. Buyout deals are a tremendous catalyst for big MFI gains, particularly for small cap stocks. The lesson here? Always carry some small caps in your MFI portfolio!

4) Expedia (EXPE) - 108% gain from week 2

Expedia delivered over 100% gains in 2012, as travel volume boomed and Expedia continued to take share in the online travel market, delivering outstanding results for each quarter of the year. The company has always been one of the top dogs (along with Priceline (PCLN)) in online travel, a secularly growing industry. The lesson? You can usually do well by picking the lead players in growing markets from MFI, especially where there are significant barriers to entry (in this case, a network effect).

3) Osiris Therapeutics (OSIR) - 110% gain from week 16

Trading in the mid-$4 range for much of the first half of the year, Osiris took off on several news items in the May-July period where it won reimbursement for its stem cell based wound care matrix Grafix, along with initial approvals for Prochymal. It is not unusual to have small, early stage pharmaceutical companies from MFI do both very well and very poorly every year. The lesson? Don't be afraid to pick a few of these from the screens, but don't expect to be able to predict how they will do, either!

2) Cray (CRAY) - 151% gain from week 2

Cray had an unbelievable year. The company sold its interconnect business to Intel (INTC), netting $140 million in cash (over half the firm's market cap at the time!) and a closer relationship with a key partner. Then a steady stream of deals culminated in the acquisition of Appro, a key competitor, in November. The lesson? Cray has always been a leader in a very niche market where competition is limited and barriers to entry are significant. This is a nice profile to look for in MFI stocks.

1) Acadia Pharmaceuticals (ACAD) - 317% gain from week 1

Trading in the high $1 range for most of the year, Acadia's rise is due to a single event:successful Phase III results from their lead Parkinson's drug, Pimavanserin, which more than doubled the stock price on November 27. This was a rather unexpected development (see our write-up through the above link), but the lesson here is similar to Osiris - don't be afraid to carry a few dev-stage pharmaceuticals, but if you are going to pick them, pick several and keep individual positions fairly small.

Disclosure: Steve owns no stocks referenced here.