Stockpickr: Signs of Life in Post-Selloff Rubble

Additionally, Stockpickr also tracks 20 Magic Formula stocks.

The Magic Formula has two inputs -- pretax earnings yield and ROIC (return on invested capital). The pretax earnings yield is found by dividing EBIT, or earnings before interest and taxes, by EV, or enterprise value, and is used as a measure of valuation.

Theoretically, all things being equal, a company with a 10% earnings yield is cheaper -- that is, a better investment -- than a company with a 5% earnings yield.

ROIC, on the other hand, is used to judge a company's quality and management's ability to allocate capital. A company with a 10% ROIC would earn 10 cents on every dollar it invests in the business. Therefore, a company with a 15% ROIC has wiser management and is of higher quality than a company with an ROIC of only 5%, all things being equal.

Let's examine three of the companies that make up the Dogs of the Magic Formula portfolio.

OmniVision Technologies(OVTI Quote) makes the chips found in many camera phones. Worries about an inventory glut have pushed shares lower over the past year. However, that said, the company has a 23% pretax earnings yield and an 80% return on invested capital. The balance sheet is pristine with $355 million in cash and no debt.

OmniVision has also appeared on a few recent lists, including Forbes' list of stocks that are down but not out, as well as in the portfolio of Volatile Asset Management.

True Religion Apparel(TRLG Quote), which makes high-quality jeans, has been hit hard lately on an earnings shortfall.

True Religion Apparel (TRLG)

True Religion has a forward price-to-earnings ratio of just 13 and a 100% return on invested capital. Additionally, it has $35 million in cash and no debt. The stage is also set for a short squeeze, with more than 44% of the outstanding shares sold short.

Top-performing mutual fund Bridgeway Micro-Cap owns shares of True Religion, and the stock also made the list of Brean Murray's Top Picks for 2007.