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Ranking the Forbes Best Small Companies List

|Includes: AEGN, ALGT, APEI, BKE, CPLA, DECK, HITT, ICON, InterDigital, Inc. (IDCC), JCOM, LHCG, NPK, NTRI, PETS, PPD, RGR, STRA, TRLG, VLTR

One of the key attractive points of Magic Formula Investing (NASDAQ:MFI) is its inclusion of small-cap stocks. In fact, it is this point that was one of the main reasons for MFI's enduring ability to outperform the market. Greenblatt's strategy worked fine for stocks over $1 billion market cap, returning 20% annually between 1988-2004 (as shown in The Little Book that Beats the Market). But when you expanded the universe of stocks to include all stocks over a $50 million market cap, the performance vastly improved, returning nearly 31% annually over the same period!

In fact, study after study has confirmed that small-caps outperform the large-caps as a group over the long run. And there are many other arguments to own them in your portfolio. Yet, investment banks, money managers, TV pundits, and research firms generally ignore them.

So, where can we go to find good small-cap ideas? MFI is certainly one place. Perhaps the most intriguing list of small-cap companies is produced every fall by Forbes, in their best small companies list. This year, Forbes editors picked 100 publicly traded companies with sales under $1 billion and a stock price above $5, filtering out firms with accounting and/or legal troubles. Then, they ranked those stocks based on an unspecified recipe including earnings growth, sales growth, and returns on equity. The result is a universe of what I found to be very intriguing small-cap companies.

I thought it would be interesting to apply the Magic Formula ranking system of earnings yield and return on adjusted capital to see which of these firms best met the "great companies at cheap prices" goal of MFI. Below are the rankings. One stock, Portfolio Recovery Associates (NASDAQ:PRAA), has an asset-based business model (like a bank or insurance company), and was excluded. Entries with an asterisk (*) currently appear in the official MFI screens. The statistics here were calculated using the MFI stats calculator tool.

Rank Company Forbes Rk Ticker EY ROIC EY Rk ROIC Rk MFI Score
1 *InterDigital 2 IDCC 20.30% 224.20% 3 3 6
2 *Pre-Paid Legal Services 78 PPD 18.30% 160.50% 7 11 18
3 *LHC Group 43 LHCG 19.60% 117.90% 5 17 22
4 *Capella Education 19 CPLA 12.00% 202.30% 18 7 25
5 *Strayer Education 14 STRA 12.00% 177.70% 18 8 26
6 *PetMed Express 82 PETS 12.00% 123.70% 18 16 34
7 True Religion Apparel 9 TRLG 21.00% 67.70% 2 34 36
8 American Public Education 3 APEI 10.70% 142.20% 26 12 38
9 *j2 Global Communications 89 JCOM 9.60% 164.50% 30 10 40
10 Iconix Brand Group 44 ICON 11.10% 116.40% 24 18 42
11 *Sturm, Ruger 73 RGR 17.50% 65.50% 8 37 45
12 Insituform Technologies 62 INSU 23.40% 55.10% 1 46 47
13 *Buckle 75 BKE 13.50% 63.40% 12 39 51
14 National Presto Industries 7 NPK 15.30% 61.50% 11 41 52
15 Volterra Semicondutor 55 VLTR 8.30% 125.20% 38 15 53
16 Hittite Microwave 18 HITT 7.70% 135.50% 44 13 57
17 NutriSystem 6 NTRI 8.30% 111.40% 38 19 57
18 Allegiant Travel 33 ALGT 12.90% 55.60% 14 45 59
19 Deckers Outdoor 4 DECK 9.80% 72.60% 29 31 60
20 UFP Technologies 12 UFPT 19.70% 45.90% 4 56 60
21 DG FastChannel 71 DGIT 9.50% 70.00% 32 32 64
22 Medifast 1 MED 8.50% 81.70% 37 28 65
23 Hawkins 60 HWKN 12.40% 54.60% 16 49 65
24 Tempur-Pedic International 15 TPX 7.50% 100.70% 46 22 68
25 NCI 93 NCIT 11.20% 55.10% 23 46 69
26 Liquidity Services 79 LQDT 5.80% 168.10% 62 9 71
27 Inter Parfums 96 IPAR 11.40% 53.40% 22 51 73
28 Synaptics 81 SYNA 8.60% 64.00% 36 38 74
29 Ansys 63 ANSS 5.10% 322.50% 74 1 75
30 FactSet Research Systems 40 FDS 5.40% 212.90% 69 6 75
31 TransDigm Group 21 TDG 6.70% 103.30% 54 21 75
32 VSE 27 VSEC 19.50% 36.00% 6 69 75
33 Middleby 68 MIDD 6.90% 83.60% 51 27 78
34 Industrial Services of America 8 IDSA 15.80% 35.50% 10 70 80
35 iRobot 16 IRBT 8.10% 60.70% 40 42 82
36 Quality Systems 22 QSII 4.60% 219.90% 79 4 83
37 Citi Trends 94 CTRN 16.90% 31.20% 9 74 83
38 Syntel 38 SYNT 6.90% 67.80% 51 33 84
39 Dolby Laboratories 17 DLB 5.60% 104.60% 65 20 85
40 NIC 92 EGOV 4.30% 218.30% 82 5 87
41 Morningstar 70 MORN 5.00% 127.40% 75 14 89
42 Darling International 59 DAR 9.60% 42.10% 30 60 90
43 Hibbett Sporting Goods 65 HIBB 8.90% 44.40% 34 57 91
44 MSCI 97 MSCI 3.30% 238.40% 90 2 92
45 Jos. A. Bank Clothiers 48 JOSB 8.10% 48.20% 40 53 93
46 Blackbaud 54 BLKB 5.40% 85.50% 69 26 95
47 AAON 77 AAON 9.50% 38.60% 32 67 99
48 GSI Technology 69 GSIT 11.80% 29.20% 21 78 99
49 Ensign Group 52 ENSG 13.50% 23.40% 12 87 99
50 LoopNet 20 LOOP 4.90% 96.90% 77 23 100
51 Sirona Dental Systems 53 SIRO 5.20% 78.10% 71 29 100
52 Lumber Liquidators 32 LL 8.70% 39.00% 35 65 100
53 Meridian Bioscience 98 VIVO 5.20% 73.70% 71 30 101
54 Raven Industries 87 RAVN 6.80% 54.90% 53 48 101
55 Steve Madden 34 SHOO 8.00% 41.20% 42 61 103
56 Wright Express 72 WXS 7.60% 42.50% 45 59 104
57 Atwood Oceanics 39 ATW 12.80% 21.50% 15 89 104
58 Interactive Intelligence 26 ININ 4.40% 92.30% 81 24 105
59 KMG Chemicals 35 KMGB 12.10% 22.70% 17 88 105
60 LMI Aerospace 46 LMIA 11.10% 24.70% 24 84 108
61 Allscripts Healthcare Solutions 41 MDRX 3.80% 87.80% 86 25 111
62 Balchem 24 BCPC 5.20% 62.60% 71 40 111
63 Dionex 86 DNEX 5.50% 55.70% 67 44 111
64 Thoratec 58 THOR 6.00% 54.50% 61 50 111
65 Boston Beer 51 SAM 6.20% 47.20% 60 55 115
66 Quaker Chemical 66 KWR 10.60% 19.70% 27 90 117
67 NetScout Systems 57 NTCT 5.00% 59.50% 75 43 118
68 Bio-Reference Laboratories 50 BRLI 7.30% 33.60% 47 71 118
69 United States Lime & Minerals 88 USLM 10.60% 19.60% 27 91 118
70 HMS Holdings 25 HMSY 3.80% 65.60% 86 36 122
71 ExlService Holdings 47 EXLS 5.60% 40.60% 65 62 127
72 ICF International 76 ICFI 6.30% 36.40% 59 68 127
73 Heico 95 HEI 5.80% 38.90% 62 66 128
74 NVE 45 NVEC 7.20% 28.70% 48 81 129
75 Integra LifeSciences 91 IART 6.40% 31.90% 57 73 130
76 Red Hat 84 RHT 1.60% 67.60% 98 35 133
77 Monro Muffler Brake 83 MNRO 6.40% 29.80% 57 77 134
78 WMS Industries 99 WMS 6.70% 28.00% 54 82 136
79 Air Methods 85 AIRM 7.90% 16.30% 43 93 136
80 Buffalo Wild Wings 64 BWLD 6.50% 25.20% 56 83 139
81 Dril-Quip 49 DRQ 5.80% 29.10% 62 79 141
82 Neogen 74 NEOG 3.60% 47.40% 89 54 143
83 Atlantic Tele-Network 67 ATNI 7.20% 13.20% 48 95 143
84 Transcend Services 10 TRCR 2.80% 52.80% 92 52 144
85 Skyworks Solutions 61 SWKS 4.00% 39.20% 84 63 147
86 GeoResources 13 GEOI 7.10% 11.20% 50 99 149
87 F5 Networks 29 FFIV 2.40% 44.10% 94 58 152
88 II-VI 100 IIVI 5.50% 24.60% 67 85 152
89 Quidel 42 QDEL 4.70% 30.60% 78 75 153
90 WebMD Health 5 WBMD 2.10% 39.20% 95 63 158
91 Sapient 36 SAPE 3.30% 32.90% 90 72 162
92 Under Armour 28 UA 4.20% 28.90% 83 80 163
93 Concur Technologies 37 CNQR 1.60% 30.50% 98 76 174
94 Continental Resources 23 CLR 4.50% 16.10% 80 94 174
95 InnerWorkings 30 INWK 4.00% 16.70% 84 92 176
96 Akamai Technologies 31 AKAM 2.50% 24.60% 93 85 178
97 T-3 Energy Services 80 TTES 3.80% 12.40% 86 97 183
98 Zumiez 90 ZUMZ 2.10% 13.10% 95 96 191
99 Rackspace Hosting 11 RAX 1.80% 12.10% 97 98 195