4 Mega-Cap Magic Formula Stock Picks

These stocks have the potential to outperform based on Magic Formula criteria

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Mar 25, 2022
Summary
  • Apple Inc, Meta Platforms Inc., Taiwan Semiconductor Manufacturing Co Ltd and Airbnb Inc. rank highly based on Joel Greenblatt's Magic Formula criteria.
  • Magic Formula stocks have high earnings yields and returns on capital.
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For a higher chance to beat the market, one method investors could try is to look for stocks that rank highly on

Joel Greenblatt (Trades, Portfolio)'s Magic Formula criteria.

Greenblatt is a successful value investor and the author of "The Little Book That Beats the Market." His Magic Formula ranks stocks based on a specific array of technical criteria, the most important being the earnings yield and return on capital.

In Greenblatt's book, these two financial ratios are defined a little differently than normal. Greenblatt calculates the earnings yield as earnings before interest and taxes (Ebit) divided by enterprise value, while the return on capital is Ebit divided by net fixed assets and working capital.

In addition to high values regarding these two financial ratios, Magic Formula stocks are further narrowed down to be companies with a market capitalization of more than $100 million, as businesses that do not meet this criteria have different capital structures. Also, the Magic Formula does not take into consideration financial and utility businesses for similar reasons.

Below are four mega-cap stock picks that rank highly on the GuruFocus Magic Formula screener, which is based on Greenblatt's formula.

Apple Inc.

The first stock is Apple Inc (

AAPL, Financial), a Cupertino, California-based manufacturer of smartphones, personal computers, tablets, wearables and accessories worldwide.

The stock closed at $174.07 per share on March 24 for a market capitalization of $2.84 trillion. GuruFocus data shows the company’s earnings yield is 4.04% versus the industry median of -4.15% and ranks higher than 50% of the 2,355 companies in the hardware industry. The return on capital is 426.36% versus the industry median of 13.12%.

The share price has risen by 43.61% over the past year to trade above the midpoint of the 52-week range of $118.86 to $182.94.

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Apple Inc. pays quarterly dividends. On Feb. 10, the company paid 22 cents per common share and, as of this writing, produces a dividend yield of 0.51%.

Meta Platforms Inc.

The second stock to consider is Meta Platforms Inc. (

FB, Financial), formerly known as Facebook, a Menlo Park, California-based social media giant.

The stock closed at $219.57 per share on March 24 for a market capitalization of $597.66 billion. The company has an earnings yield of 5.27% (versus the industry median of 1.37%) and a return on capital of 74.37% (versus the industry median of 16.59%).

The share price has dropped by 22.40% over the past year to trade significantly below the midpoint of the 52-week range of $185.82 to $384.33.

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Meta Platforms Inc. does not pay dividends.

Taiwan Semiconductor Manufacturing Co Ltd

The third stock to consider is Taiwan Semiconductor Manufacturing Co Ltd (

TSM, Financial), a Taiwanese global producer and distributor of integrated circuits.

The stock closed at $107.92 per share on March 24 for a market capitalization of $559.65 billion. The company has an earnings yield of 4.20% versus the industry median of 3.49%, ranking higher than 55% of the 886 companies in the semiconductors industry. The return on capital is 36.99% versus the industry median of 18.38%.

The stock price is down 7.41% over the past year but remains significantly below the midpoint of the 52-week range of $97.62 to $145.

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Taiwan Semiconductor Manufacturing Co Ltd pays quarterly dividends. On April 14, the company will pay 49 cents per common share, and on July 14, it will pay 49.3 cents per common share. The latter yields a forward dividend yield of 1.83% as of this writing.

Airbnb Inc.

The fourth stock to consider is Airbnb Inc. (

ABNB, Financial), a San Francisco, California-based provider of a marketplace where guests can book private rooms, primary homes, or vacation homes from hosts through an online platform or through mobile devices.

The stock closed at $170.83 per share on March 24 for a market capitalization of $109.82 billion. The company has an earnings yield of 0.14% (versus the industry median of -0.10%) and a return on capital of 67.75% (versus the industry median of -0.08%).

The stock price is down 2.03% over the past year to trade just a little bit below the midpoint of the 52-week range of $129.71 to $212.58.

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Airbnb Inc. does not pay dividends.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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