So what are some good Magic Formula® companies to consider investing in right now?
The way we're going to answer this question is to do some quick research and apply these 5 tips for filtering out the best Magic stocks from the rest.
To save some you time, and to "feed a man (or woman) a fish", here are 5 names that more or less meet all of those criteria for a "good" Magic Formula stock.
United Therapeutics (UTHR)
United Therapeutics is a specialty pharmaceutical company that focuses on a single niche: pulmonary arterial hypertension, or PAH, treatments. The firm dominates this space with 3 drugs - Remodulin, Tyvaso, and Adcirca. Better dosage, administration, and stability characteristics have earned UTHR a leading position in the field. The company has delivered robust revenue growth, almost 30% annually since 2008, while rapidly expanding margins through that period as well. UTHR is also in great financial shape, sporting a current ratio near 2 and a debt/equity ratio at a minuscule 0.06. The stock has been a winner over the past several years, and a recent pullback could represent an attractive entry point for prospective new buyers.
Catching a retail concept early in its growth stage is a good way to win in the market, and Francesca's is just that, and selling at a bargain valuation to boot (11% earnings yield). FRAN has the growth we are looking for, with a 3 year compound annual revenue growth rate (CAGR) of 35%. It is very financially healthy, with a current ratio over 4 and a quick ratio over 2 (remarkable for a retailer). Operating margins, at over 24%, are some of the best you'll ever see for a retailer. With the company only halfway to its store target, and opening 60 or more new locations a year, significant growth potential remains.
USANA Health Sciences (USNA)
USANA is a multi-level marketing (MLM) company that sells vitamins, supplements, shakes, snack bars, skin and health care products. USANA has delivered significant, steady growth, with a 3-year revenue CAGR of about 11%. Operating margins have expanded over that same time period, from under 12% in 2009 to over 16% today. Financial health is a non-issue, as the company carries zero debt and sports liquidity ratios well over the minimum targets. Like the rest of the MLM space, USANA was brought down by Nu Skin's (NUS)recent troubles in China. While China is a significant contributor to USANA (38% of sales), the company hasn't been relying solely on that geography for growth. The subsequent pullback in the stock price could present a buying opportunity.
American Public Education (APEI)
American Public Education offers online-only courses to military and public service (police, fire, etc.) members. Avoiding the now 3 year slump for paid education companies, APEI has managed to grow revenues at a 3 year CAGR of over 25%, while maintaining operating margins above 22% - impressive. As with all of these names, financial health is not a problem, as APEI carries no debt and sports very safe current and quick ratios over 2.7. The earnings yield of 11.6% represents true value for this kind of quality. This is one to look into for any value investor.
Questcor Pharmaceuticals (QCOR)
If there was a Magic Formula "Hall of Fame", Questcor would be an inductee. At its first appearance in the screen, in May of 2008, the stock traded at about $4.70. Today it is over $65. Questcor has grown revenues at a mind boggling 3-year CAGR of 79%, and actually managed to expand margins from an already high 47% in 2009 to 56% today. At the same time, Questcor has managed a conservative balance sheet with virtually no debt and current/quick ratios well over 2.0. Investors have been doubting that the company's single, un-patented, overpriced drug - Acthar - can continue to grow so profitably without competition eating it up. But with most recent quarter revenue growth at a robust 68%, the company is showing few signs of slowing. An earnings yield of over 10% makes this still a bargain vs. the market.