Magic happens when discipline meets opportunity. And in the world of small-cap investing, few strategies have been as consistently intriguing, and polarizing, as Joel Greenblatt’s Magic Formula. By ranking stocks based on a combination of high return on capital and low valuation, the formula filters out the hype and shines a light on companies quietly compounding wealth under the radar.
For May 2025, we’ve refreshed our Magic Formula screen and narrowed in on the top 10 small-cap stocks that check both boxes: they’re cheap, and they’re efficient. These are the kinds of businesses that Wall Street fund flows often miss, but individual investors like you can still exploit; if you’re willing to do a little digging and act with conviction.
This month’s list spans sectors and industries, but each name earns its spot by ranking near the top on both earnings yield and return on invested capital. In other words, you’re looking at businesses that are squeezing more profit out of every dollar and still trading at bargain-bin prices.
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Keep in mind: small-cap stocks don’t move in a straight line. But over time, quality plus value has a way of asserting itself. Whether you use this list to spark deeper research or to spot patterns in capital efficiency and valuation compression, I believe these 10 names deserve a place on your radar right now.
Let’s get into the rankings.
Keep in mind that Greenblatt advocates a cut off at $50 million market cap so you have sufficient liquidity in the stock. We have 3 stocks in this list very close to, but under this cut-off. Review these stocks and you can determine if you want to keep these in your watch-list.
Here are some of my brief notes on each of the stocks:
- CCSI: Intriguing but with a current ratio of 0.9 there may be a liquidity issue going forward. Avoid.
- NOTE: Negative cash flow. Avoid.
- SITE: Real estate is not very profitable today and the financials look weak. Avoid.
- SBC: Everything looks good and the company is poised to grow. I would like to review this further in detail. Add to the Watchlist.
- CHRS, INBX, PBYI: I do not invest in small bio-tech firms due to cash burn and unpredictable prospects. Avoid.
- NRT, PRT, VOC: As Royalty Trusts in the energy sector, the price correlates to the oil prices and the stocks are cheap. You would invest in these for their yield, which is quite good. I try not to speculate on commodity prices in my value portfolio. Avoid.
Greenblatt expects you to take the top magic formula stocks as is and invest in them at the beginning of the period and hold for 1 year. Generally speaking, this should work out better than buying random stocks with no process. However, we can do better by applying our own valuation and qualitative filters.
Of this list of 10 stocks, I find SBC to be the only one I will take for further review.
