MagicDiligence (61.50)

Ranking the Forbes Best Small Companies List

November 08, 2010 – Comments (0) | RELATED TICKERS: IDCC , PPD.DL , DECK

One of the key attractive points of Magic Formula Investing (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 (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