MW These 15 stocks are the most profitable companies in the S&P 500

By Mark Hulbert

A company's operating profitability is the top factor in stock selection, and should be an investor's main focus

Various stock-valuation factors "all basically bet on the same thing." What is that thing? Profitability.

Keeping it simple is a good idea when it comes to investing in high-quality, defensive value stocks - especially now.

Too many financial analysts, either out of ignorance or the desire to attract business, make investing far more complicated than it needs to be. Case in point: Hundreds of new stock-selection factors have been "discovered" over the past two decades, especially as some traditional factors - such as value - have underperformed. Some have taken to calling this large and growing collection the "factor zoo."

A new study, however, finds that many of these variables can be narrowed to just one: profitability.

Entitled "Profitability Retrospective: What Have We Learned?" the study was conducted by Robert Novy-Marx, a finance professor at the University of Rochester, and Mamdouh Medhat, research director & vice president at Dimensional Fund Advisors. The researchers calculate a company's profitability as the ratio of its operating profit to its book equity. Operating profit is revenue minus the cost of goods sold, operating expenses and interest.

The researchers reported that once you select stocks that are the most profitable and shun those that are least profitable, you gain little if any further advantage by focusing on any of the factors that focus on "quality," such as return on equity and earnings volatility.

There's also no reason, the research showed, to focus on "defensive" factors such as low beta and low volatility, or "alternative value" - attempts to improve on the traditional definition of value, such as including intangible assets in the calculation of book value.

In short, the authors of this new study reported that factors in these categories "all basically bet on the same thing." What is that thing? Profitability.

One likely reason the "factor zoo" has become so overcrowded is that investment firms are always looking for new products that are seemingly unlike others. A 2023 study in the Review of Financial Studies found that exchange-traded fund providers in recent years have tried to differentiate themselves from competitors by launching increasingly narrow offerings that, not coincidentally, allow them to charge higher fees.

These providers have a strong incentive to keep investors from knowing that their expensive offerings may be nothing more than overpriced portfolios of the most profitable companies.

The most obvious investment implication of the "Profitability Retrospective" study is to invest in a diversified portfolio of the most profitable companies. One ETF that does so is the DFA's US High Profitability ETF DUHP, with an expense ratio of 0.21%. (The study's co-author Medhat works for DFA, while co-author Novy-Marx is a consultant to the firm.)

For stock pickers, the investment implication is to favor stocks that are the most profitable (defined, as mentioned above, as the ratio of operating profits to book equity) and avoid those that are the least profitable. Without access to a huge database, you can't rank all publicly traded stocks according to their profitability, but it's relatively simple to do the calculation with a handful of stocks. (The necessary data points are readily available when analyzing any ticker at MarketWatch.) Between any two stocks that you otherwise like equally, choose the one with greater profitability.

Below is a list of the 15 stocks in the S&P 500 with the highest operating profitability. The top five include Colgate-Palmolive Co. $(CL)$, DaVita Inc. $(DVA)$, Verisk Analytics Inc. (VRSK), AbbVie Inc. $(ABBV)$ and Live Nation Entertainment Inc. (LYV). The list also includes Home Depot Inc. $(HD)$, Apple Inc. $(AAPL)$ and Oracle Corp. $(ORCL)$

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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March 31, 2025 07:35 ET (11:35 GMT)

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