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:

• BoA to consumers: Feel free to sue... Bank of America (BAC) is dropping a requirement that forced consumers with disputes on credit cards or other accounts to enter into arbitration. The move, which comes as the government pushes for stronger consumer financial protection, is considered a win for consumers, as many faulted the arbitration process for being biased. Consumers will now be able to file lawsuits directly against the bank if they suspect unfair or illegal practices. American Express (AXP) and JPMorgan Chase (JPM) both say they're evaluating changes to their policies on resolving consumer disputes as well.
• ...and BoA does some suing of its own. Bank of America (BAC) won a restraining order preventing Colonial BancGroup (CNB) from selling or disposing of more than $1B in cash and loans held by Colonial. Following an announcement by Colonial that it may be put into receivership, Bank of America had filed suit earlier in the week, alleging the funds are being held in custodianship for Ocala Funding, the commercial-paper vehicle backed by Taylor, Bean & Whitaker. Bank of America also filed a lawsuit against Shelbourne Development Group, which has stopped construction on a 150-floor Chicago condominium tower, alleging the company has defaulted on a loan.
• Fed demands CIT plan. CIT Group (CIT) signed an agreement giving the Federal Reserve strong oversight over its operations, and pledging to submit a recapitalization plan and to strengthen its management and operational controls. CIT has 15 days to craft its plan for raising capital and meeting its debt obligations, and 60 days to review how it manages credit risk. CIT must also get permission from the Fed before paying dividends or pursuing other transactions. (Read the Fed agreement (.pdf))
• China opens its internet dam. China has given up its controversial plans to force filtering software to be installed on all computers produced or sold in the country. A government minister said "we will fully respect everyone’s freedom of choice and will absolutely not force the installation on all PCs sold," although the filter, called Green Dam/Youth Escort, will still be installed on computers in schools, internet cafes and other public spaces.
• That's all, Volks! After nearly a year of takeover attempts and negotiations, Volkswagen (VLKAY.PK) will pay around €3.3B ($4.7B) for a 42% stake in Porsche's core sports-car division, ahead of a full merger to take place in 2011. To help pay for the purchase, Volkswagen will issue new preferred shares in the first half of next year. The combined automaker's operating profit is expected to rise by €700M annually.
• Conflicting stories on Opel deal. Magna International (MGA) said it reached an agreement in principle with General Motors to buy 55% of Opel. Magna co-CEO Siegfried Wolf said some changes were made in the more than 600-page-long offer but "roughly speaking there are no unresolved issues with management any more." GM's top negotiator denied Magna's assertions and said no deal has yet been reached.
• Ford ups production on rising demand. Ford (F) plans to increase its Q3 production by 10,000 vehicles to 495,000 as cash-for-clunkers drives demand. Ford's production will be 18% higher than the same quarter in 2008, and the company set a Q4 production target of 570,000 vehicles, which would be a 33% increase on the previous year. Meanwhile, the White House loosened the cash-for-clunkers rules yesterday, allowing consumers to apply vouchers to cars that are out of stock.
• No new frontiers for Southwest. Southwest Airlines (LUV) lost its bankruptcy auction bid for Frontier Airlines to smaller company Republic Airways Holdings (RJET), losing an opportunity to operate flights outside the U.S. for the first time. Southwest said a 'key reason' it lost the bid was because it wouldn't drop its requirement that Frontier's pilot union reach an agreement with Southwest's pilots.
• Retail sales miss. July's retail sales came in at -0.1% vs. consensus of +0.8%. Excluding automotive, sales were down 0.6% vs. +0.1% consensus. Gas station sales were down 32.5% from a year ago (-2.1% M/M). Building material and garden equipment sales were 14.7% lower (-2.1% M/M). Health and personal sales (+4.1%) and restaurants (+1%) were the only retail components to post positive sales growth over the past year. Overall, sales are 8.3% lower than a year ago.
• Jobless claims rise. Initial jobless claims were 558K, up 4K from a week ago, and worse than the 545K consensus. Continuing claims fell 141K to 6.202M.
• Import prices drop. July's Import Price Index fell 0.7% vs. consensus of -0.5%, primarily due to a fall in petroleum prices. Import prices are down 19.3% vs. a year ago. Export prices fell 0.3%.

Earnings: Friday Before Open

• Abercrombie & Fitch (ANF): Q2 EPS of -$0.30 vs. consensus of -$0.07. Revenue of $648M (-23.3%) in-line. (PR)

Earnings: Thursday After Close

• American Apparel (APP): Q2 EPS of $0.06 beats by $0.03. Revenue of $136M (+2%) vs. $140M. Sees full-year revenue of $540M-555M vs. $568M and expects to open 25-30 new stores. (PR)
• Autodesk (ADSK): Q2 EPS of $0.24 beats by $0.05. Revenue of $415M (-33%) vs. $414M. (PR)
• Blockbuster (BBI): Q2 EPS of -$0.19 misses by $0.07. Revenue of $1B (-22%) vs. $1.1B. (PR)
• Darling International (DAR): Q2 EPS of $0.14 in-line. Revenue of $155M (-30%) vs. $160M. (PR)
• DeVry (DV): FQ4 EPS of $0.51 in-line. Revenue of $396M (+43%) vs. $377M. (PR)
• Elizabeth Arden (RDEN): FQ4 EPS of -$0.07 beats by $0.01. Revenue of $213M (-10%) in-line. Sees FY10 EPS of $0.50-0.65 vs. $0.72. (PR)
• Nordstrom (JWN): Q2 EPS of $0.48 in-line. Revenue of $2.1B (-6%) in-line. Same-store sales down 12.3%. Raises full-year EPS guidance to $1.50-1.65 from $1.25-1.50 vs. consensus of $1.48. Sees full-year same-store sales down 9-12%. (PR)
• Red Robin Gourmet Burgers (RRGB): Q2 EPS of $0.41 beats by $0.04. Revenue of $201M (-3%) vs. $206M. (PR)
• SatCon Technology (SATC): Q2 EPS of -$0.13 misses by $0.05. Revenue of $9M (-31%) vs. $15M. (PR)
• Ticketmaster (TKTM): Q2 EPS of $0.20 misses by $0.04. Revenue of $312M (-18%) vs. $396M. (PR)

Today's Markets

Overseas markets were mostly higher Friday, while U.S. futures have traded in a tight range.

CPLF Energia (CPL), Cemig (CIG)

By Brad Zigler

Real-time Monetary Inflation (per annum): 8.0%

In case you haven't noticed, several commodities have swung to a bullish mode now, particularly RBOB gasoline, the soybean complex and corn. Less well-developed are the trends in the petroleum complex, softs such as coffee, sugar and orange juice, feeder cattle and wheat.

• Insurers get TARP nod. After waiting a half-year, six insurers were cleared to receive up to $22B in TARP funds late Thursday. Hartford Financial (HIG) was approved for $3.4B; Lincoln National (LNC) said it may receive $2.5B; also approved were Allstate (ALL), Prudential Financial (PRU), Principal Financial Group (PFG), and Ameriprise Financial (AMP). One analyst called the decision "a deal with the devil," but said the move may have been unavoidable, because the collapse of any one could ignite another round of panic. It's not clear that all six will avail themselves of TARP money.
• Barclays explores $10B sale of BGI. Barclays (BCS) is reportedly in talks to sell its entire asset-management unit, Barclays Global Investors, for as much as $10B. That's more than double the $4.4B Barclays would get for BGI's iShares ETF business from buyer CVC Capital Partners, which gave Barclays until June 18 to seek better offers. Potential buyers include BlackRock (BLK) and Bank of New York Mellon (BK). Unlike its peers (LYG and RBS), Barclays has shunned government money, but it needs cash to bring its capital ratio in line. A sale would leave Barclays in a solid position, but with a less-diversified business. Murray Coleman explores the ramifications of a sale for the ETF industry.
• Euro area GDP shrinks at record clip. Euro region GDP fell 2.5% in Q1 from last quarter, the fastest contraction on record, Eurostat said Friday morning. From a year ago, the euro-area economy shrank 4.6%, also the biggest drop on record. Inflation held steady at 0.6% in April. On May 7, the ECB lowered its benchmark rate to 1%, a level economists expect will be maintained, or even trimmed further. (see Eurostat's GDP and inflation data (.pdf))
• Feds 'urge' changes at BofA. Regulators are pushing for major changes in Bank of America's (BAC) board of directors, which is intriguing considering many of the bank's woes stem from its shotgun merger with Merrill Lynch after heavy pressure from the feds. A spokesman wouldn't comment on regulators' requests, but said all of the 19 banks that recently underwent government stress tests have been "directed" to review their managements. The meddling is remarkable, considering the government does not own a stake in most of the banks, including BofA.
• Temasek dumps BofA, looks to emerging markets. Temasek Holdings sold its 3.8% stake in Bank of America (BAC) for about $1.3B, at a loss of about $4.6B. The Singapore state-owned fund, which earlier this week boosted its stake in China Construction Bank, and whose investments shrank 31% over the past eight months, said it will continue to reduce its exposure to developed economies. "The belief now is that the world is not so American-centric anymore," a Singapore economist said.
• Rio Tinto says Chinalco deal is still on table. Rio Tinto (RTP) said Friday it remains committed to a $19.5B deal with Chinalco (ACH), and said the plan has now received U.S. regulatory approval, pouring cold water on speculation it might be backing away from the tie-up in favor of a public rights offering. Shares +1.6% premarket.
• Economists foresee protracted U.S. recovery. WSJ's latest economist survey predicts the recession will be over by August. Recovery, on the other hand, will be subdued and protracted. In the words of one economist: The Fed's "big guns" have "effectively averted a depression, or a much more severe recession." Q2 GDP is seen at -1.4%, a huge improvement from Q1's 6.1% drop.
• GM nears deal with UAW. Sources say GM (GM), under the direction of the Treasury, is near a deal with the UAW that would cut hourly labor costs by more than $1B/year, and halve its remaining commitment to cover healthcare costs to $10B. In exchange, the UAW would receive a 39% stake in a reorganized GM. With UAW backing in sight, Treasury insiders are increasingly confident they can push through a GM reorganization, despite the protests of bondholders who say they're getting the short end of the stick. Meanwhile, in Canada GM is seeking massive cuts in workers' pensions in a deal with the CAW.
• Jobless claims jump. Initial claims for the week came in at a higher-than-expected 637,000 (consensus 610K), the Labor Department said Thursday, and were up 32K from last week's 605K (revised). Continuing claims, which measure the total number of unemployed claiming benefits, rose 202K to 6.56M. The sharp rise may indicate new jobless claims haven't peaked as many hoped, but regardless, overall unemployment is nowhere near its top.
• Wholesale prices up slightly. Producer Prices rose 0.3% in April from March, a drop more than the 0.2% gain economists predicted. Prices are down 3.7% vs. a year ago. Core PPI gained 0.1%, and is up 3.4% vs. last year.
• 30-year fixed mortgage rates climbed 0.02 points to 4.86%, Freddie Mac said Thursday in its weekly report. Rates remain near their record low of 4.78%, but rates have yet to make a run at the 4% some anticipated following the government's aggressive support of mortgage markets.

Earnings: Friday Before Open

• Abercrombie & Fitch (ANF): Q1 EPS of -$0.31 misses by $0.17. Revenue of $612M (-23.5%) vs. $616M. (PR)
• AngloGold Ashanti (AU): Q1 EPS of $0.42 misses by $0.12. Q1 production of 1.1M oz., down 13%. (PR)

Earnings: Thursday After Close

• Blockbuster (BBI): Q1 EPS of $0.12 misses by $0.03. Revenue of $1.12B (-19.5%) vs. $1.3B. Shares -22.8% AH. (PR)
• Compuware (CPWR): FQ4 EPS of $0.20 beats by $0.01. Revenue of $253M (-25.2%) vs. $268M. Shares -1.6% AH. (PR)
• Darling International (DAR): Q1 EPS of $0.06 in-line. Revenue of $133M (-34.1%) vs. $147.7M. Shares +1.5% AH. (PR)
• Nordstrom (JWN): Q1 EPS of $0.31 beats by $0.05. Revenue of $1.71B in-line. Raises full-year EPS guidance to $1.25-1.50 vs. $1.27 consensus. Same-store sales fell 13.2%. Shares +1.8% AH. (PR)

Today's Markets

Strong gains in Asia Friday, but Europe is flat and futures have turned negative.

By Brad Zigler

The recent rendering of the markets has got traders worried. But some investors (no, not short sellers) hope that rendering actually leads to profits. Darling International Inc. (NYSE: DAR), the largest publicly traded food by-products recycling company in the United States, releases its fourth-quarter and year-end results on Wednesday. The ensuing market action is bound to affect holders of the Market Vectors Agribusiness ETF (NYSE Arca: MOO).

So much of the sentiment is negative right now, I set out to find some companies that have been doing things right. Having a high EBITDA growth rate means the company is growing nicely either internally or through acquisition. The low debt means that the companies are well positioned financially, which is important in this tumultuous time. And, finally, the high ROC shows that the company used its shareholders’ money well and is providing them an excellent return. Putting all of these qualities together means a company had a successful year in an awful environment.

The rotation dilemma

Sticking to basics

If you assume that we don't enter a depression and the companies could actually get financing right now, a stunning number of high quality companies - companies with high cash flow and relatively low debt - could take themselves private at today's prices.  Obviously, the assumptions of the screen are unrealistic currently.  If General Electric (GE) is paying Warren "Loan Shark" Buffett ten percent interest rates, then most other companies won't be able to find financing.  But that's beside the point.  At these prices, many quality companies are cheaper than they have been in history.  Money is still available - it's just scared and sitting on the sidelines.  If we see any return to stability in the financial system, many of the stocks on the list could see 25% - 50% upside just by a return to median multiple.        

Staying power

Darling International (DAR) is the only nationwide supplier of rendering and grease trap services to restaurants, butchers, grocery stores, and other food service establishments in the United States. Basically, Darling collects waste materials and processes them into products that can be used as inputs to other industries. Finished products include: Meat and bone meal that is used to make pet and animal feed; Tallow and other oils used in the production of feed, soaps, chemicals, and bio-fuels; and hides used to make leather goods.

Darling has two main lines of business. Rendering, which accounted for 72% of 2007 sales, is the business of converting waste products into usable raw materials. Restaurant Services (28%) provides grease trap services (pickup and cleaning), as well as specialized equipment for making the job of cleaning frying equipment much easier. The company runs 39 facilities including 25 rendering plants, 6 grease plants, and a number of smaller specialized sites. Darling consolidated the rendering business in a big way by purchasing National By Products (NBP) in 2007, and has driven impressive operating synergies from the acquisition.

3Com

3Com (COMS) is a leading provider of secure, converged voice and data networking solutions for enterprises of all sizes.

3Com offers a broad line of innovative products backed by world class sales, service and support, which excel at delivering business value for its customers. Through its TippingPoint division, 3Com is a leading provider of network-based intrusion prevention systems that deliver in-depth application protection, infrastructure protection, and performance protection.

Time for Crew - J. Crew (JCG), Urban Outfitters (URBN), TJ Maxx (TJX), Gap Stores (GPS)

I've been meaning to write about Darling International (DAR) for a while. Since I picked it up in March, it's been one of my better performers. Here's the business summary from Yahoo Finance:

Darling International, Inc. provides rendering, recycling, and recovery solutions to the food industry worldwide. It operates in two segments, Rendering and Restaurant Services. The Rendering segment engages in the collection and processing of animal by-products, including hides, from butcher shops, grocery stores, food service industry, and meat and poultry processors. It converts these products principally into useable oils and proteins utilized by the agricultural, leather, and oleo-chemical industries. The Restaurant Services segment involves in the collection of used cooking oils from food service establishments and recycling them into similar products, such as high-energy animal feed ingredients and industrial oils. It also provides grease trap collection services and sells equipment to restaurants. Darling International sells its products through commodities brokers and company agents, as well as directly to customers. The company was founded in 1882. It was formerly known as Darling-Delaware Company, Inc. and changed its name to Darling International, Inc. in 1993. The company is headquartered in Irving, Texas.

We are in the midst of a cyclical downturn in the economy. When it will turn up again is something debated ad nauseum, but it will turn up again. One area that has captured my attention over the past several months is the broad theme of recycling. As a society, we are becoming increasingly aware of the scarcity of our natural resources. While most investors are familiar with more traditional recycling plays, I have identified several that could be described as more modern versions. The companies in the table below share the common trait of reusing materials that would otherwise be considered waste to create alternative supply sources for new products (or aiding in that process). With these companies, perhaps investors don’t have to worry as much about when the economic cycle improves:

Stocks discussed in the lightning round session of Jim Cramer’s Mad Money TV program, Monday March 24. Click on a stock ticker for more analysis:

Bullish calls:

AT&T (T)
Eastman Kodak (EK): “They have a great printing business. I am sticking with Kodak.”
Korea Electric Power (KEP): “This stock could go up seven to eight points, I want you to keep it.”
General Mills (GIS): “I’d rather see you in GIS or Kellogg [than in CPB].”
Kellogg (K)
Darling International (DAR): “Their CEO [Randall Steuwe] tells a good story, I want to stick with him, he's money in the bank!"
Lindsay Corporation (LNN): “They had a monster quarter. I want you to stick with that one."
Mastercard (MA): "I think Mastercard is cheaper and the better deal here [than Visa].”
NuStar Energy (NS): "I've been working on this one; they yield fabulously. I want to back up the truck on this one, I believe in them."

Q4 2007 Earnings Call

February 28, 2008 10 am ET

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program,Wednesday March 12. Click on a stock ticker for more analysis.

Hormel (HRL), Smithfield Foods (SFD)