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 (
) -- 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
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.
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 - Get Report)
- 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
: 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.