Magic Formula Showdown: Why CVS Beats Qualcomm and Valero for Retirees
An evaluation of three stocks selected by Greenblatt's Magic Formula shows that CVS is best suited for retirees due to stable dividends and low volatility, while Qualcomm and Valero offer higher returns but carry more risk.
According to an analysis by 24/7 Wall St., Joel Greenblatt's Magic Formula ranks stocks based on earnings yield and return on capital, but for retirees these metrics can lead to disaster. Three stocks passed the screen, but only one survives when income reliability and volatility are considered.
The Magic Formula Details
Greenblatt's formula ranks stocks by two criteria: earnings yield and return on capital. The three stocks that emerged are:
- CVS Health (CVS)
- Qualcomm (QCOM)
- Valero Energy (VLO)
Why CVS Wins for Retirees
When additional criteria like dividend stability and low volatility are introduced, CVS stands out. CVS has a long history of stable dividends and operates in the healthcare sector, which has relatively stable demand. In contrast, Qualcomm faces volatility in the tech sector, while Valero is affected by oil price fluctuations.
Context
Retiree investors seek reliable income and lower risk. While Qualcomm and Valero may offer higher short-term returns, their high volatility makes them less attractive for those dependent on steady income.
What This Means for Investors
For retiree investors, the analysis shows that adding extra criteria to the Magic Formula can improve stock selection. CVS offers a good balance of yield and stability, making it a preferred choice for income-focused portfolios.
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