10 Small Cap Magic Formula Stocks

Introduction

Magic Formula Stocks have a track-record of beating the market over time. When Greenblatt wrote about the magic formula investing process, he recommended going for stocks above $50 million in market capitalization. At VSG we run our screens with the minimum market cap at $30 million. Other than this, this screen exactly follows Greenblatt's magic formula.

Screen Details

This screen looks for small cap stocks between $30 million and $2 Billion in market capitalization with highest earnings yield and return on capital, as modified by Joel Greenblatt:

Avoid Financials and Utilities
Avoid ADRs
Greenblatt Earnings Yield, pick from the highest
Greenblatt ROC, pick from the highest

We have limited the results to the top 10 stocks. The stocks are ranked with 50% weight to Greenblatt Earnings Yield and 50% weight to Greenblatt ROC.

The screen was run with the Stock Rover screener, and we found 10 stocks listed on the American exchanges that fit this criteria. You can download the filter criteria here so you can import it in your Stock Rover account and run it yourself as you need. Don't have a Stock Rover account? Sign up here for a 2 week free trial. You can read my review of Stock Rover here

The Screen Results

Stock	Company	Sector	Greenblatt Earnings Yield	Greenblatt ROC
BPT	BP Prudhoe Bay	Energy	51.9%	8240.8%
HCC	Warrior Met Coal	Basic Materials	41.7%	44.5%
HEAR	Turtle Beach	Technology	35.6%	49.7%
INVA	Innoviva	Healthcare	17.8%	68.1%
MSB	Mesabi Trust	Basic Materials	13.4%	163.4%
NRT	North European Oil	Energy	12.9%	351.7%
PBT	Permian Basin Royalty	Energy	12.1%	685.5%
PRT	PermRock Royalty Trust	Energy	15.7%	1251.7%
RMR	RMR Group	Real Estate	33.3%	81.4%
SIGA	SIGA Technologies	Healthcare	85.8%	292.5%

Access all our stock screens here

Notes and Observations

The Magic Formula Screener is non-discretion based. This means you just pick the top stocks and buy them mechanically. If this is what you want to do, just use the stocks listed above. If you wish to add a little bit more discretion, you can run these stocks through an additional filter.

Here, I did a quick Price/Graham Number calculation on these stocks, and find the following stocks to have the P/GN below 1:

HCC: P/GN = 0.3. Selling at very low multiples with P/E Ratio at 1.6. Coal may be on its way out, but perhaps this can be a great cigar-butt stock. Interested enough to consider it further.
HEAR: P/GN = 0.9. CEO transition and earnings decline. Looks cheap and added to my further review list.
INVA: P/GN = 0.9. I avoid bio-tech stocks as it is out of my circle of competence
PRT: P/GN = 0.5. Avoid oil for now.
SIGA: P/GN= 0.5. I avoid early stage pharmaceutical companies as it is out of my circle of competence.

Ending Note

We have 2 stocks from the list to review further. Despite these stocks being the result of the magic formula screener, which is meant to be a turnkey screener, I do intend to evaluate these stocks with my own value investing philosophy. I suggest you do so too.