These days, it's not all about working hard. It's more about working hard and efficiently. So why not apply that strategy to your investments?
To measure a company's efficiency, you can examine its return on equity (ROE). This ratio is composed of a company's profit margin multiplied by its asset turnover, multiplied by its financial leverage. It measures how efficiently the company employs its owners' capital. In a nutshell, it measures your bang per buck as an investor. Take 3M (NYSE:MMM), which boasts an ROE of 31%, or Altria (NYSE:MO), which rocked a whopping 87% over the past 12 months. The higher the ratio, the better -- a higher ratio means a more efficient company, and a more effective executive team when it comes to managing the business. It's these sorts of companies you should consider for your portfolio.
Image source: Getty Images.
To uncover some of the most efficient companies out there, I did a screen using the Motley Fool's CAPS screening tool. I looked for companies with:
- CAPS ratings of five stars, the highest ratings from our CAPS community.
- ROE of 25 or greater.
- Market caps of $500 million or greater.
In the first 20 months since we began tracking our CAPS investment community in November 2006, five-star companies have outperformed the market with average annualized gains of 12%.
Voila! Here's what popped out after I used the scanner recently. You can run the screen, too, but note that the results might be different as the data updates.
|
Company |
Market Cap |
Return on Equity (TTM) |
|---|---|---|
|
3M |
$40.5 billion |
30.9% |
|
ABB (NYSE:ABB) |
$34.4 billion |
39.7% |
|
Altria |
$31.7 billion |
154% |
|
Core Laboratories |
$1.57 billion |
119% |
|
Federated Investors |
$1.88 billion |
57.1% |
|
Joy Global (NASDAQ:JOYG) |
$2.6 billion |
70.3% |
|
Magellan Midstream |
$926 million |
124% |
|
OptionsXpress (NASDAQ:OXPS) |
$810 million |
36.9% |
|
Pepsico (NYSE:PEP) |
$86.4 billion |
35.2% |
|
Rockwell Collins |
$6.5 billion |
48.2% |
|
Schlumberger (NYSE:SLB) |
$56 billion |
31.8% |
|
Williams Partners |
$773 million |
116% |
Source: Motley Fool CAPS. TTM = trailing 12 months.
While the stock screener is a great tool, it should only be the first step in your investment research. Examining other aspects of specific companies, such as return on invested capital, liquidity, and debt-to-equity ratio, will also help you determine if a company is right for your portfolio.
Start increasing the efficiency of your investments at Motley Fool CAPS today. Let the collective wisdom of our 125,000-member-strong investment community help you make better investing decisions.
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Jennifer Schonberger does not own shares of any of the companies mentioned in this article. PepsiCo is a Motley Fool Income Investor selection. Federated Investors and 3M are Inside Value picks. optionsXpress Holdings is both a Stock Advisor and a Motley Fool Hidden Gems Pay Dirt choice. The Motley Fool has a disclosure policy.
