5 Interesting Large-Cap Magic Formula Stocks

February 09, 2010 – Comments (0) | RELATED TICKERS: AAPL , GIS , CLX

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.  [more]