It has been a couple of months since I looked at stocks that appear on the magic formula screen. I have been a bit disappointed with the results some of the members of the Magic Formula Yahoo Group. Some of the members have given up on the magic formula completely and I do not blame them. Nevertheless, the screen does provide a list of potentially undervalued stocks and it doesn’t hurt to look at some of the names that are found on the screen.
From past experience, you will often find companies from sectors that are out of favor. For example, currently there are several companies from the “for profit education” industry such as Apollo Group (APOL), Capella Education Co. (CPLA), and ITT Educational Services (ESI). You could also add the home healthcare industry.
In particular, I look for large cap stocks that appear in the small cap screens such as the top 30 magic formula stocks with a market cap greater than 50 million. Why look at these large caps? They rank high. For a large cap stock to appear in a small cap screen tells me it ranks higher than most small caps.
Interesting Magic Formula Stocks
Dell (DELL)- The old PC manufacture has been a magic formula staples for quite some time. While it may not grow as fast, its transforming itself to an enterprise solutions provider (think HP and IBM) and moving away from its mature PC business. It’s a mistake for analysts to believe the company will grow like it used to. Dell is no longer the PC manufacture that grew out of a Texas dorm room but rather a 25 billion market cap mature tech behemoth. Nevertheless, with 10 billion in cash and no debt, Dell is certainly one magic formula to watch.
Forest Laboratories (FRX) Another magic formula veteran. Forest is expected to lose patents n several key drugs that derive 85% of the company’s revenues. Nevertheless, the company’s pipeline looks promising and has made several acquisitions to prepare for the fall in revenue. Carl Icahn has taken a stake in the company and will likely pursue some type of action as the company is flooded with cash and is producing cash flow like crazy.
PetMed Express (PETS) A nationwide pet pharmacy that delivers prescription and non-prescription pet medications for dogs, cats, and horses directly to the consumer. Has consistent and high ROE and ROIC numbers. PETS also has a 5% dividend yield that makes it attractive for income investors. The company has a 190 million market cap, 40 million in cash and no debt. PETS currently trades at historical low multiples despite growing at a rapid pace.
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