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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

4 Small-Cap Magic Formula Stocks

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (MagicDiligence.com) -- The Magic Formula Investing (MFI) strategy is simply a ranking system.

Any particular universe of stocks can be ranked in the strategy's fashion: a composite of highest earnings yield and highest adjusted return on capital, both factors equally weighted.

You can apply the strategy to rank any "basket" of stocks, ranging from entire exchange listings (or groups of exchange listings), to a prescreened list of stocks, and so forth. The possibilities are limitless.

The official MFI site allows users to rank all U.S.-listed stocks, separated only by minimum market cap.

So, for example, choosing the top 50 stocks with a minimum of $100 million market cap will produce a much different list than choosing the top 50 with a minimum $1 billion market cap.

This is useful, as many investors are uncomfortable buying issues of thinly traded, micro-cap stocks that they may not familiar with (even though small-caps drastically improve performance).

MagicDiligence uses three screens in particular to search for stocks to recommend: the top 50 stocks with more than $50 million in market cap (the "small-cap" screen), the top 50 with more than $1 billion ("mid-cap") and the top 30 with more than $3 billion ("large-cap"). By combining the three, we get a good mix of cheap, quality stocks ranging from tiny unknown firms to ultra-large-caps.

However, sticking to these three screens means that a few stocks will slip through the cracks. The market-capitalization range that falls through the cracks most frequently is stocks in the $250 million to $750 million range, a range that many investors find intriguing for investment potential.

Using the official site and running several screens between these ranges, I found four interesting MFI stocks that were not screened by my usual methods. Small-cap investors may want to take a closer look at them:

Kulicke & Soffa Industries (KLIC)

  • Market Cap: $630 million
  • Adjusted Earnings Yield: 28.7%
  • Adjusted Return on Capital: 72.3%
  • Cash / Debt / Current Ratio: $203.6m / $100.1m / 5.31
  • 5-year Expected Growth Rate: 13.5%
  • Dividend Yield: N/A
  • Piotroski Score: 8.5

Comments: K&S is a semiconductor equipment company, one of many in the Magic Formula screens right now. K&S's specialty is selling tools for the bonding process, where the semiconductor device itself is connected with the containing plastic package. Semi equipment is a very cyclical business, and we are coming off a boom year where K&S more than tripled revenues from 2009. The company has a good balance sheet and an emerging opportunity in LED bonders, but many analysts expect chip equipment demand to fall off significantly in 2011. Even so, the stock looks oversold.

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