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MagicDiligence (< 20)

Top 10 Fastest Growing Companies in Magic Formula Investing

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July 15, 2010 – Comments (1) | RELATED TICKERS: DRWI , AMED , PRSC

No metric is more loved on Wall Street than revenue growth rates. The pace of revenue growth is usually a major factor in the valuation assigned to a given company. Analysts routinely "pooh-pooh" quarterly earnings per share beats that are accomplished through cost cutting or share buybacks rather than top-line (sales) growth.

To a large extent, this is understandable. The life blood of any company is sales. There is a limited amount of growth that can be extracted through cost controls, reflected by the old business wisdom that "you can't cost cut your way to prosperity!". The very best stock opportunities are those with significant revenue growth potential that can achieve that growth with relatively little capital investment, and where the stock can be bought at a reasonable price.

Magic Formula Investing is, without question, a value-based screen. It may surprise many, then, that there are plenty of fast growing companies in the screen. Many of these companies trade at dirt cheap valuations that are usually reserved for declining industries or companies that are in danger of insolvency. Below are the top 10 current fastest growing Magic Formula stocks, ranked by their compound annual growth rate (CAGR) in sales over the past 3 completed fiscal years. For each, the Magic Formula-adjusted earnings yield and return on capital figures are provided, and the current ratio is provided for a quick view of financial health (anything over 1.2 is considered reasonably healthy). Finally, a short business synopsis and opinion is provided for each. For stocks that MagicDiligence has detailed research on, a link has been provided.

Perhaps some of these fast growing value stocks will be of interest? Starting from the bottom (all statistics based on prices from 7/13):

#10: China Education Alliance (CEU)

3-year Sales CAGR: 28.8%
MFI Earnings Yield: 29.8%
MFI Return on Capital: 187.3%
Current Ratio: 42.04 (not a misprint)

Thoughts: CEU provides testing materials and also operates an English language training center in China. The stock has been dragged down with all China small-caps, but also has a nasty habit of diluting existing shareholders. Still, a great balance sheet and good growth trajectory ahead.

#9: Amedisys (AMED)

3-year Sales CAGR: 29.4%
MFI Earnings Yield: 30.7%
MFI Return on Capital: 188.8%
Current Ratio: 1.09

Thoughts: Recently lost over 25% of market value after pre-announcing weak second quarter results and disclosing an SEC investigation. Home health care services and hospice care. Highly reliant on Medicare. Good play on demographics, as long as the government doesn't torpedo it.

#8: GT Solar (SOLR)

3-year Sales CAGR: 30.7%
MFI Earnings Yield: 19.9%
MFI Return on Capital: 166.7%
Current Ratio: 1.42

Thoughts: GT Solar makes equipment used to produce solar panels. Growing market, for certain, but reliant on government subsidies due to high price/power ratio. Also, GT relies on just a few customers for the bulk of revenues. If "clean, renewable energy" (tm) continues to draw government dollars, company stands to continue doing very well.

#7: Almost Family (AFAM)

3-year Sales CAGR: 31.5%
MFI Earnings Yield: 25.1%
MFI Return on Capital: 241.2%
Current Ratio: 2.57

Thoughts: Virtually a clone of Amedisys, and down for the same reasons. However, AFAM does have a better balance sheet and a concentration in Florida, where many potential clients will end up retiring.

#6: China Sky One Medical (CSKI)

3-year Sales CAGR: 38.2%
MFI Earnings Yield: 43.9%
MFI Return on Capital: 73.4%
Current Ratio: 5.75

Thoughts: One of the most notorious stocks in all of MFI, with a rabid group of shorts alleging fraud. Company makes over-the-counter health products in China, now attempting to transition into traditional drug development. Extraordinarily cheap with a compelling growth story, if you believe the numbers.

#5: Providence Service Corp (PRSC)

3-year Sales CAGR: 41.1%
MFI Earnings Yield: 17.0%
MFI Return on Capital: 135.2%
Current Ratio: 1.41

Thoughts: Outsourced social service counseling and non-emergency transportation services. Steadily working down debt. Risks include high reliance on government spending and a growth-by-acquisition strategy that has seen them overpay in the past.

#4: Genoptix (GXDX)

3-year Sales CAGR: 45.9%
MFI Earnings Yield: 29.4%
MFI Return on Capital: 89.1%
Current Ratio: 8.82

Thoughts: Medical diagnostic testing services, particularly bone marrow testing. MagicDiligence has not looked at this one in detail yet, but the growth is for real, the balance sheet is excellent, and the company is respected by doctors. Spending this year has far outpaced revenue growth, sending the stock off a cliff.

#3: Immunomedics (IMMU)

3-year Sales CAGR: 52.2%
MFI Earnings Yield: 15.0%
MFI Return on Capital: 186.4%
Current Ratio: 6.09

Thoughts: A small research stage biotech. Growth is misleading and related to a one-time $31 million termination fee from UCB relating to drug epratuzumab. Clearly a "Magic Formula Mirage" stock with unsustainable growth.

#2: DragonWave (DRWI)

3-year Sales CAGR: 61.8%
MFI Earnings Yield: 46.0%
MFI Return on Capital: 111.8%
Current Ratio: 4.72

Thoughts: Makes cellular backhaul radio equipment for build-out of cell networks. Growth exploded due to contract with Clearwire (CLWR) to build out Sprint's (S) 4G LTE network. Now that expansion is slowing down, DragonWave is drastically lowering guidance, and the stock has tanked. Positioned in a good secular growth industry, could be worth a look.

#1: Jiangbo Pharmaceuticals (JGBO)

3-year Sales CAGR: 238%
MFI Earnings Yield: 70.0%
MFI Return on Capital: 136.5%
Current Ratio: 2.24

Thoughts: Grew from just $3 million in revenues in 2007 to nearly $120mm in 2009. However, revenues are down over 20% in the first 9 months of fiscal 2010. They make a number of Western-style OTC drugs in China. Trading volume is very low, with many days trading 100 shares or less.


Disclosure: Steve owns CSKI, AFAM, CEU

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1 Comments – Post Your Own

#1) On July 23, 2010 at 10:48 AM, LANaturist (99.15) wrote:

FWIW,  Amedisys (AMED) is hitting 52 week lows today.

But I realize that MFI isn't a short term trading method.  So we will have to see what AMED looks like in a year.

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