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MagicDiligence (< 20)

3 Quality, Cheap Micro-Caps Not In MFI But Should Be

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3

April 16, 2010 – Comments (1) | RELATED TICKERS: UTRA.DL , FUQI.DL , HTRN.DL

What we know for certain about the screening criteria at the official Magic Formula site is detailed in The Little Book that Beats the Market and on the site itself. The appendix in particular of Joel Greenblatt's book provides some details as to how both earnings yield and return on capital are calculated. Many (including MagicDiligence) have tried to recreate the statistics to meet those from the screen, and in general have gotten pretty close. But the exact formulas remain, like Coca-Cola (KO), a well-kept secret (the "new" official site doesn't even list them anymore).

This has led to some questions as to why certain stocks that certainly appear to have Magic Formula statistics don't appear on the screen. Using an alternative MFI screen at Magic Formula Investing EU, I've dug up and verified 3 interesting micro-cap stocks that seem to have MFI-worthy statistics yet do not appear on any of the official screens. They might be worth some additional research by both MFI and value investors in general.

Universal Travel Group (UTA)

Market Cap: 158 million

MFI Earnings Yield: 20.7%

MFI Return on Capital: 78.4%

5-year Expected Growth Rate: 25%

Dividend Yield: N/A

Comments: Universal Travel is a small online travel booking service in China, focusing on two provinces in southeastern China. While facing the duopoly of Ctrip (CTRP) and eLong (LONG), UTA is still growing sales at near-20% rates, and the overall Chinese travel market is growing at nearly 15% a year. A 21% earnings yield is quite a cheap valuation for that kind of growth, plus a debt-free balance sheet. On the risk side, the company has been highly dilutive and could have trouble managing their breakneck expansion.

HealthTronics (HTRN)

Market Cap: 168 million

MFI Earnings Yield: 27.3%

MFI Return on Capital: 81.5%

5-year Expected Growth Rate: 15%

Dividend Yield: N/A

Comments: HealthTronics provides services and equipment for urology. Some examples include lithotripsy, a non-invasive technique to break up kidney stones, and also prostate and kidney problems. The company is growing sales at about 10-15%, has a good balance sheet, and a well-respected, young CEO in James Whittenberg. 2010 forecasts puts the forward P/E at under 12, which is quite cheap. On an MFI basis it is exceptionally cheap with an earnings yield over 25%. Like Universal Travel, HealthTronics has appeared in the MFI screen before but has mysteriously disappeared recently.

Fuqi International (FUQI)

Market Cap: 325 million

MFI Earnings Yield: 30.9%

MFI Return on Capital: 38.8%

5-year Expected Growth Rate: 20%

Dividend Yield: N/A

Comments: Fuqi develops gold, diamond, and other precious metal jewelry and sells it to distributors in China. Small-cap Chinese is where the value is right now, and one of the concerns seem to be common amongst them - uncertainty over accounting. Fuqi has failed to file their Q4 results in a timely matter, receiving a de-listing notice, and cash flow continues to come in negative, while reported earnings skyrocket (Q3 sales grew 36% and profits 192% year-over-year). However, at a 31% earnings yield with 20% expected growth, there just might be enough risk priced into the stock to earn big returns here.

Steve owns UTA

1 Comments – Post Your Own

#1) On April 16, 2010 at 9:31 AM, BullishBilly (38.90) wrote:

Another odd thing about the MFI screen is that none of the stocks on there has a "most recent quarter data" from any later than January 31st. 

 

It seems the screen is lagging.  Is this typical for the screen?

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