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MagicDiligence (< 20)

Stocks To Buy In Forbes' Best Small Companies List



November 20, 2014 – Comments (0) | RELATED TICKERS: RGR , MED , MYGN

Every year in the fall, Forbes publishes its annual list of America's Best Small Companies: 100 public companies with sales under $1 billion.

Forbes looks for small companies with strong sales growth, expanding profit margins, and high returns on equity - the signs of a prospering, efficient business.

These are great characteristics, of course, but to consider an investment in any of these stocks we need to consider THE most important characteristic: the stock's valuation! Great, growing companies often have lofty valuations that put a lid on the returns available for new shareholders.

So how can we find the best potential investments from this list of undeniably excellent smaller businesses?

Putting the Magic in Forbes' List

To rank the stocks by relative investment-worthiness, we can use the techniques from Joel Greenblatt's Magic Formula® Investing strategy - find stocks with high earnings yields (i.e., selling cheaply) combined with high returns on capital (i.e., quality businesses).

The easiest way to start is by simply seeing which of Forbes' stocks currently show up in the "official" Magic Formula screens. Currently there are 6:

Sturm Ruger & Co Inc. (RGR): #9 on Forbes' list
Anika Therapeutics Inc (ANIK): #10
Myriad Genetics Inc (MYGN): #16
Syntel Inc (SYNT): #26
Alliance Fiber Optic Products Inc (AFOP): #40
RPX Corp (RPXC): #62

Additionally, there 4 more that show up on our own Top 100 over $50 million market cap screener:

Medifast Inc. (MED): #18 on Forbes' list
SL Industries Inc. (SLI): #23
Computer Programs and Systems Inc (CPSI): #50
IPCM: #76

That's 10 quality small cap companies that are likely selling at very attractive prices. For anyone interested in great small companies at bargain valuations, these 10 should be near the top of your research list!

The Full List

The MagicDiligence Portfolio Ranker tool allows you to enter any list of stocks and have them instantly ranked using the Magic Formula method, so I punched in the Forbes' list to see how they lined up. RPXC had to be excluded because the company actually operates at a negative invested capital when intangibles and goodwill are backed out! Here is the ranked list, from most attractive to least:

Note: I tried to paste the table into CAPS but it did not format correctly.  To see the entire formatted table, please visit the original article at the link below.  I try to always post the full content of articles into CAPS but sometimes it just doesn't work right!  Apologies. 



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