To increase their chances of beating the market, one method investors could try is to look for stocks that rank highly based 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.
Qualcomm
The first stock is Qualcomm Inc. (QCOM, Financial), a San Diego-based manufacturer of semiconductors for mobile devices and other wireless products.
The stock closed at $134.93 per share on May 13 for a market capitalization of $151.12 billion. GuruFocus data shows the company’s earnings yield is 8.69% versus the industry median of -4.59%. The return on capital is 292.16% versus the industry median of 20.82%.
The stock is up 3.95% in the past year, but still trades below the midpoint of the 52-week range of $122.17 to $193.58.
Qualcomm pays quarterly dividends. On June 23, the company will pay 75 cents per common share and, as of the time of writing, produces a forward dividend yield of 2.22%.
Hanesbrands
The second stock to consider is Hanesbrands Inc. (HBI, Financial), a Winston-Salem, North Carolina-based manufacturer and seller of various basic apparel for men, women and children.
The stock closed at $13.06 per share on May 13 for a market capitalization of $4.56 billion. The company has an earnings yield of 9.04% (versus the industry median of 5.68%) and a return on capital of 42.06% (versus the industry median of 10.64%).
The stock price is down 34.31% in the past year to trade below the midpoint of the 52-week range of $12.11 to $20.74.
Hanesbrands pays quarterly dividends. On May 31, the company will pay 15 cents per common share and, as of the time of writing, produces a forward dividend yield of 4.59%.
Ericsson
The third stock to consider is Telefonaktiebolaget L. M. Ericsson (ERIC, Financial), a Stockholm, Sweden-based information and communications technology solutions provider in North America and internationally.
The stock closed at $7.65 per share on May 13 for a market capitalization of $25.51 billion. The company has an earnings yield of 13.15% versus the industry median of 4.74%. The return on capital is 136.42% versus the industry median of 13.35%.
The stock price is down 41.87% over the past year, trading below the midpoint of the 52-week range of $7.30 to $13.72.
Ericsson paid a semi-annual dividend of 11.4 cents per common share on Oct. 19, 2021 and a semi-annual dividend of 13.3 cents per common share on April 13. The payment results in a 12-month dividend yield of 3.23% at the time of writing.
Tapestry
The fourth stock to consider is Tapestry Inc. (TPR, Financial), a New York-based retailer of luxury accessories and branded lifestyle products worldwide.
The stock closed at $31.51 per share on May 13 for a market capitalization of $109.82 billion. The company has an earnings yield of 10.7% (versus the industry median of 5.29%) and a return on capital of 45.86% (versus the industry median of 11.86%).
The stock price is down 33.48% over the past year to trade below the midpoint of the 52-week range of $26.39 to $48.01.
Tapestry pays quarterly dividends. On June 27, the company will pay 25 cents per common share and, as of this writing, produces a forward dividend yield of 3.16%.
