It’s now the ninth month during which I will be selecting stocks using the Magic Formula methodology. Starting in late January, I have been adding three stocks each month to the Magic Formula portfolio I include in my weekly comparison. It’s not quite the strategy Greenblatt suggested, as he recommended something like 6-8 stocks per quarter. In any case, I’ve chosen the monthly route for various reasons. (From a numbers standpoint, the best time to make selections might be right after the quarterly earnings reports, but that’s merely supposition, and since these reports are often delayed anyway, there may not be much advantage.)

At least for the moment, my methodology remains the same: pull the current list of top 30 stocks with a market capitalization of at least $50 million from the  Magic Formula website, rank the list according to my own recreation of the formula, and then pick the top three that I don’t already own. It’s relatively simple, mechanical, and prevents me from having to make any emotional decisions. There is probably little advantage to this method rather than simply choosing a random set of three, but as a numbers person, this method appeals to me more. Your mileage may vary.

Anyway, of these top 30 stocks, I seem to already own 15 of them, so I have to move reasonably far down the list. (Nine of my current stocks have fallen off the list, mostly because their prices have risen to points where they’re no longer such a bargain.) Here are my three selections for this month:

MIPS Technologies Inc. (MIPS)

  • Price: $3.96
  • Market Cap: $178.517M
  • Enterprise Value: $155.666M
  • Earnings Yield: 13.807%
  • Return on Invested Capital: 824.080%

The MIPS name will be familiar to many of you in the computer field, as the producer of both embedded processors and instruction set architectures used both in commercial applications (their processors) as well as in education, teaching programming students assembly language. Chances are, you’ve used something that’s been touched by MIPS, as their processors are used in numerous devices, including DVD players, televisions, laser printers, and video game consoles, including the Playstation 2. After making an IPO in 1998, MIPS became yet another darling of the dot com era, before ultimately declining after the bust. The stock performance over the last five years has been none too impressive, with a persistent, if unsteady decline. There does not appear to be a dividend, so I have my doubts about the future performance of this stock.

GigaMedia Ltd. (GIGM)

  • Price: $4.83
  • Market Cap: $262.583M
  • Enterprise Value: $206.559M
  • Earnings Yield: 15.520%
  • Return on Invested Capital: 236.775%

Another technology company in what is looking like a round of technology stocks, GIGM provides software and services for various online games, especially in Asia. Looking at the price history, it suffered a catastrophic decline after the dot com bust, but began to show a trend of strong growth in 2006. The trend did start reversing toward the end of 2007, and the current trend appears to be one of neutrality. While they paid a dividend once before, there is no evidence that this is continuing.

j2 Global Communications, Inc. (JCOM)

  • Price: $22.19
  • Market Cap: $999.926M
  • Enterprise Value: $812.812M
  • Earnings Yield: 12.881%
  • Return on Invested Capital: 632.590%

JCOM offers messaging and other communications services, such as voicemail, e-mail, and call handling around the globe. Barring a decline in 1999-2000, JCOM otherwise shows signs of steady growth. This growth has been somewhat interrupted since late 2007, but how much of that has do with the company itself and how much is resulting from the recent deflation, I have no idea. In any case, there is a rough trend of rising prices so far this year. Unfortunately, this stock also pays no dividend, so any income will have to come from capital gains.

In a nice change of pace, there were no pharmaceutical companies this time around. Of course, instead, I ended up with three technology companies. On the other hand, it isn’t 2000 anymore, so I’m not particularly concerned. These stocks should be added to the virtual portfolio sometime tomorrow, as well as $150 being added to each of the other portfolios.

Disclaimer: This post is a description of my own forays into investing, and should not be construed as investment advice or the recommendation of any particular security over any other. Please consult your investment adviser or accountant before making any investment decisions. What’s right for me is very likely to not be right for you.