4 Small-Cap Magic Formula Stocks

USANA Health Sciences(USNA)

• Market Cap: $560 million
• Adjusted Earnings Yield: 13.2%
• Adjusted Return on Capital: 103.4%
• Cash / Debt / Current Ratio: $24.2m / $0 / 1.39
• 5-year Expected Growth Rate: 14%
• Dividend Yield: N/A
• Piotroski Score: 6

Comments: USANA is a direct marketing firm that sells nutritional and personal care products, under the labels USANA Nutritionals and Sense, respectively. The bulk of the product lineup are vitamin supplements and skin/hair care. The company sells worldwide, with a significant presence in China and Southeast Asia. While I've been generally wary of direct marketing business models, the fact is that the others screened by MFI have performed very well, such as Nu Skin(NUS) and Pre-Paid Legal(PPD). These consumer-based products also have the advantage of being a fairly stable source of cash flows.

VAALCO Energy(EGY)

• Market Cap: $402 million
• Adjusted Earnings Yield: 25.2%
• Adjusted Return on Capital: 67.6%
• Cash / Debt / Current Ratio: $91.2m / $0 / 3.95
• 5-year Expected Growth Rate: 2%
• Dividend Yield: N/A
• Piotroski Score: 7.5

Comments: VAALCO is a small, independent oil driller, operating four fields offshore of Gabon, Africa. Several new Gabon wells were drilled in 2010 that should allow the company to start increasing production after several years of stagnation. The recent acquisition of 640 acres on the Granite Wash formation in Texas are expected to be drilled this year. Higher production and higher crude prices are a good combination for higher stock prices, and VAALCO's strong balance sheet provides protection in the event of a downturn in oil.

Dolan Corp.(DM)

• Market Cap: $345 million
• Adjusted Earnings Yield: 11.7%
• Adjusted Return on Capital: 139.3%
• Cash / Debt / Current Ratio: $4.9m / $139.2m / 1.03
• Dividend Yield: N/A
• Piotroski Score: 7.5

Comments: Dolan is a two-headed company. The biggest head (more than 50% of sales) is providing mortgage default processing services to lenders and lawyers for residential real estate in some of the most hard-hit states (California, Florida, Nevada, etc.). The other half publishes business journals and targeted commercial newspapers. Dolan has thrived throughout the housing bust, with revenues more than doubling since 2007. Investors are worried about the default business slowing down, but Dolan recently guided to a 8% gain in sales and 17% gain in EPS for 2011. Given the huge clog in the mortgage default pipeline, I'd say there are still several years of outsized business to be had here.

At the time of publication, Alexander owned no position in any stocks discussed in this article.

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