Every year Fortune publishes its highly regarded Fortune 500, a list of the top 500 companies in the U.S. by revenue. While revenue is important, it should never be the gauge for the success of a business or management team. For an investor, the most important measure is the return a company earns on the cash it invests. For that reason I created the Value Investor 500, a qualitative look at the top 500 publicly traded companies in the U.S. Read on for more on the Value Investor 500, the top 25 stocks in it, and one Value Investor 500 company Warren Buffett and The Motley Fool both like right now.
Value Investor 500
To construct a quality-based list of the top 500 companies in the U.S. I focused on what's really important for investors to pay attention to:
- The amount of cash a company generates: free cash flow.
- How much capital it took to earn that cash: pre-tax return on invested capital.
The resulting list is called the Value Investor 500, as value investors are concerned with the quality of the business, not just its size. As Warren Buffett has said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." The top businesses on the list have all the hallmarks of wonderful companies, though they vary in terms of price.
You can read the full explanation of the Value Investor 500, but a good example showing the difference between the Fortune 500 and Value Investor 500 is provided by Hewlett-Packard (NYSE: HPQ ) . In 2011, HP's business was slowing, and it was No. 10 on the Fortune 500. At the same time the company was No. 177 on the Value Investor 500 with a five-year average pre-tax ROIC of 20.4%. To grow, HP acquired Autonomy, a British company focused on enterprise search and knowledge management, for $11 billion. This turned out to be a terrible mistake.
One year later, HP took an $8.8 billion loss on its ownership of Autonomy, as well as another $8 billion charge on an earlier acquisition from 2008. On the Fortune 500, HP only fell from No. 10 to No. 15, not because of the loss, but because its revenue from its businesses was failing anyway. On the Value Investor 500 however, HP fell from No. 177 to No. 336, as its five-year average pre-tax ROIC dropped to 8%.
Another good example showing the difference is provided by Apple (NASDAQ: AAPL ) . In 2012, Apple was 17th on the Fortune 500 with revenue of $108 billion but second on the Value Investor 500 with a five-year average pre-tax ROIC of 261%. Since then, Apple's business has grown to revenue of $156.5 billion, putting it at No. 6 on the 2013 Fortune 500. On the Value Investor 500, Apple dropped from No. 2 to No. 12 with a five-year average pre-tax ROIC of 80.8% as the company has invested more capital in its business as it has grown.
The resulting list is a qualitative look at the top 500 publicly traded companies in the U.S. While it's nowhere near perfect, it is intended to be representative of the 500 best-performing publicly traded businesses today.
In the top 25, there are some surprises, but also some of the names you might expect, such as Apple and MasterCard. The slideshow below takes you through the top 25 and shows your how their pre-tax ROIC has changed over the past five years.
The Motley Fool and Warren Buffett have both succeeded in investing by following a strategy of investing in great companies and holding them for the long term. While only one of Warren Buffett's long-term holdings -- Moody's -- is in the top 25, 11 of the 25 companies are recommendations of Motley Fool investing services.
One Value Investor 500 Stock Warren Buffett and the Motley Fool Both Like Right Now
There's one company in the Value Investor 500 that both Warren Buffett and the Motley Fool like right now. Imagine a company that rents a very specific and valuable piece of machinery for $41,000 -- per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click here to discover more about this industry-leading stock and join Buffett in his quest for a veritable landslide of profits!