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Magic Formula Investing (MFI) is probably most popular for digging up attractively priced and quality small-cap stocks that have been overlooked or misunderstood by the market. Small-caps are usually not covered by a lot of analysts and not talked about on CNBC, yet small-cap value has been the best performing equity group historically. The book behind MFI, Joel Greenblatt's The Little Book that Beats the Market, confirms that this group also performs better using the strategy's principles. While the book's analysis showed the top MFI stocks of any size outperforming the S&P 500 by 18.5% annually, limiting to just the largest 1,000 stocks reduced outperformance to 11.2% annually.

While that is a significant drop, it is still an outstanding performance. There are clearly reasons why some investors prefer to stick to large-cap companies in their equity portfolios. For one, these stocks are more familiar to investors, making them easier to understand. Large companies also (usually) have much wider product lines, better economies of scale, long operating histories, diverse customer bases, and easy access to the credit markets, all of which most small-caps cannot boast. Additionally, large-caps usually have less volatile up-and-down price swings, which can be un-nerving to inexperienced investors. Many people feel more comfortable investing in large companies because of these advantages.

Recently, Forbes published its annual Leading Companies list, which ranks the top 150 worldwide companies by a composite of sales, profits, assets, and market value. MagicDiligence thought it would be interesting to take this list and rank the stocks by the Magic Formula statistics of earnings yield and adjusted return on capital, to show which of these large companies were above average in efficiency and below average in price.

A few caveats first. As you will see, we came up well shy of 150 companies. In fact, only 58 of them were able to be ranked in MFI fashion. There are several reasons for this. First, any banks, insurance companies, investment firms, and utilities had to be removed, as Magic Formula Investing specifically throws them out by design. This alone eliminated a third of the list. Next, I only included stocks which can be bought on a major U.S. exchange, eliminating several unlisted foreign firms. Finally, some stocks had incomplete data, causing an inability to calculate the necessary stats. By the way, all statistics were calculated with MagicDiligence's free MFI Statistics Calculator.

The table below shows the list, ordered from most attractive by MFI stats to least attractive. The companies with an asterisk (*) currently appear on one or more screens from the official MFI site.

Rank	Company	Ticker	EY	EY Rank	ROIC	ROIC Rank	Composite Rank
1	*Philip Morris Int'l	PM	19.2%	4	176.3%	1	5
2	AstraZeneca	AZN	19.3%	3	100.2%	4	7
3	*IBM	IBM	15.6%	8	72.0%	6	14
4	Unilever	UN	11.2%	13	65.8%	8	21
5	Statoil	STO	26.1%	2	33.0%	22	24
6	*Microsoft	MSFT	9.4%	21	115.7%	3	24
7	GlaxoSmithKline	GSK	11.8%	12	52.1%	12	24
8	Telefonica	TEF	16.9%	6	35.7%	19	25
9	Johnson & Johnson	JNJ	9.8%	18	57.5%	9	27
10	Eni SpA	E	30.7%	1	28.1%	27	28
11	ABB	ABB	11.0%	15	48.4%	13	28
12	United Parcel Service	UPS	11.2%	13	38.8%	18	31
13	*Lockheed Martin	LMT	12.2%	10	33.6%	21	31
14	CVS Caremark	CVS	10.7%	16	42.8%	15	31
15	Time Warner	TWX	10.5%	17	39.3%	17	34
16	Hewlett-Packard	HPQ	9.4%	21	46.7%	14	35
17	Google	GOOG	7.8%	33	140.7%	2	35
18	Telecom Italia	TI	18.7%	5	18.5%	37	42
19	Oracle	ORCL	7.2%	38	99.0%	5	43
20	Total S.A.	TOT	16.2%	7	18.0%	38	45
21	Pfizer	PFE	9.3%	23	29.6%	25	48
22	Proctor & Gamble	PG	7.2%	38	54.0%	10	48
23	Wal-Mart Stores	WMT	9.7%	19	22.2%	31	50
24	Cisco	CSCO	6.5%	44	66.6%	7	51
25	BP	BP	15.2%	9	16.4%	42	51
26	Abbott Labs	ABT	7.5%	36	39.8%	16	52
27	Novartis	NVS	9.3%	23	23.1%	30	53
28	Chevron	CVX	11.9%	11	14.7%	44	55
29	Apple	AAPL	5.9%	47	52.6%	11	58
30	ExxonMobil	XOM	9.5%	20	16.6%	40	60
31	Comcast	CMCSA	8.7%	28	22.0%	32	60
32	Coca-Cola	KO	6.8%	42	35.7%	19	61
33	Siemens	SI	9.0%	27	20.6%	35	62
34	Intel	INTC	7.6%	35	27.2%	28	63
35	AT&T	T	9.1%	26	17.8%	39	65
36	Kraft	KFT	6.9%	41	31.3%	24	65
37	Nokia	NOK	6.6%	43	31.6%	23	66
38	Disney	DIS	7.9%	32	20.6%	36	68
39	Verizon	VZ	9.2%	25	12.3%	47	72
40	PepsiCo	PEP	5.8%	48	28.7%	26	74
41	Target	TGT	8.4%	31	14.3%	45	76
42	Deutsch Telekom	DT	8.5%	30	11.8%	48	78
43	Home Depot	HD	7.1%	40	16.6%	40	80
44	British American	BTI	4.3%	52	24.3%	29	81
45	Posco	PKX	8.6%	29	9.6%	52	81
46	Ford Motor	F	7.4%	37	12.9%	46	83
47	Schlumberger	SLB	4.5%	51	20.9%	34	85
48	ConocoPhillips	COP	7.8%	33	7.0%	55	88
49	News Corp	NWS	6.1%	46	16.2%	43	89
50	Rio Tinto	RTP	0.2%	58	21.0%	33	91
51	Canon	CAJ	5.1%	49	9.9%	49	98
52	PetroChina	PTR	6.3%	45	8.4%	53	98
53	Vale	VALE	4.9%	50	9.8%	50	100
54	Boeing	BA	3.3%	55	9.7%	51	106
55	Honda Motor	HMC	4.3%	52	4.1%	57	109
56	China Mobile	CHL	2.7%	56	8.2%	54	110
57	Tesco	TESO	3.7%	54	5.2%	56	110
58	China Unicom	CHU	1.4%	57	1.4%	58	115

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Comments

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Posted by jpaa74 on 2011-05-20 16:46:40

Where is ARO (Aropostale), DELL, HRB (H&R Block) and Unisys on this list?? Filtering for min market cap of 100 mil. and top 50 companies, all of these show up, and they have for a LOOOONG time...! Since ARO dropped about 15% yesterday,I wouldn't be surprised if we see ARO back on the TOP 30 list with only 50 mil market cap as minimum...

Unisys show up even on the min. 50 mil. and only top 30 stocks, even though it's a HUGE company, and both DELL and HRB show up on the top 30 list just by raising the min. market cap from 50 to 100 mil.

Also, raising the screen criteria to min. 5000 mil market cap (maximum on Joel's filter) and to the top 50 stocks, MANY of the stocks that are included in the above list are NOT included in Joel's maximum large cap screen, which I've never seen him actually recommend using. Only market caps up to 1 billion. Just a few examples are JNJ (Johnson and Johnson) and PG (Procter and Gamble).

Not even your number one ranked stock, PM (Philip Morris international) show up on any of Joel's screens, although I have seen it listed there before.

How do you explain this incredibly large discrepancy between your global magic formula screen, and Joel's US only screen? Your screen, since it is global, should at least list Joel's top US stocks, since you do have a fair amount of them listed on your list, correct? They should essentially be the same for the US stocks, correct?

Looking forward to you reply and answer to these questions.

Regards,

SnowballInvestor

PS: To your credit, MSFT (Microsoft shows up high on both your list as well as Joel's top 30 list with min. 50 mil. market cap, even though it's a HUGE multi-billion company...! This was the only stock I could find that was also listed high on Joel's magic formula list (the inventor of it, and the original).

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Posted by Steve on 2011-05-22 05:38:54

Like the article says, this is the Forbes' Top 150 list (from 2010 no less), ranked by Magic Formula stats. It is not the list from Joel Greenblatt's site.

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Posted by jpaa74 on 2011-05-23 09:15:03

Apologies then! I thought this was YOUR ranking of the top international 150 companies. If it's also over a year old, I can certainly understand the descrepencies.

Do you have/maintain a similar list, which is up-to-date?

SnowballInvestor

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