10 Best High Quality Magic Formula Stocks for February 2026
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Market Overview & Selection Criteria
In the current market environment, value investors seek companies with strong fundamentals trading below their intrinsic value, particularly those exhibiting high ROIC, robust free cash flow, and attractive quality ratings from ValueSense analysis. This watchlist features 10 high-quality stock picks selected using ValueSense's proprietary methodology, focusing on the Magic Formula approach—high return on invested capital combined with strong earnings yield. These stocks span financials, commodities, consumer staples, insurance, and telecom sectors, identified through automated screening for undervaluation (current price vs. intrinsic value), quality ratings above 5.9, and solid financial metrics like FCF margins over 12% and ROIC exceeding 23%. This educational analysis highlights opportunities in best value stocks for diversified portfolios, drawing exclusively from ValueSense data.
Featured Stock Analysis
Stock #1: Banco Santander, S.A. (SAN)
| Metric | Value |
|---|---|
| Market Cap | $189.4B |
| Quality Rating | 6.7 |
| Intrinsic Value | $17.3 |
| 1Y Return | 152.5% |
| Revenue | $75.9B |
| Free Cash Flow | $20.1B |
| Revenue Growth | (3.4%) |
| FCF margin | 26.5% |
| Gross margin | 63.0% |
| ROIC | 25.8% |
| Total Debt to Equity | 288.1% |
Investment Thesis
Banco Santander, S.A. (SAN) stands out with a Quality rating of 6.7 and an intrinsic value of $17.3, suggesting significant undervaluation potential for value-focused analysis. The company boasts a massive Market Cap of $189.4B, Revenue of $75.9B, and impressive Free Cash Flow of $20.1B, underpinned by a healthy FCF margin of 26.5% and Gross margin of 63.0%. Despite a slight Revenue growth decline of 3.4%, its ROIC of 25.8% reflects efficient capital allocation in the financial sector. The standout 1Y Return of 152.5% demonstrates market recognition of its resilience, making SAN a compelling pick for investors studying high-quality financials with strong cash generation.
This analysis reveals SAN's ability to maintain profitability amid challenges, supported by its scale and margins that position it well for long-term value creation in global banking.
Key Catalysts
- Exceptional 1Y Return of 152.5%, signaling strong momentum and investor confidence.
- High FCF of $20.1B with 26.5% margin, providing flexibility for dividends or buybacks.
- Robust ROIC at 25.8%, indicating superior capital efficiency.
- Large scale with $75.9B revenue and $189.4B market cap for stability.
Risk Factors
- Elevated Total Debt to Equity of 288.1%, increasing leverage vulnerability in rising rate environments.
- Negative Revenue growth of 3.4%, potentially signaling competitive pressures in banking.
- Currency and geopolitical risks from international operations.
Stock #2: BHP Group Limited (BHP)
| Metric | Value |
|---|---|
| Market Cap | $175.7B |
| Quality Rating | 6.6 |
| Intrinsic Value | $65.8 |
| 1Y Return | 40.9% |
| Revenue | $107.3B |
| Free Cash Flow | $20.7B |
| Revenue Growth | (10.1%) |
| FCF margin | 19.3% |
| Gross margin | 48.7% |
| ROIC | 28.5% |
| Total Debt to Equity | 46.9% |
Investment Thesis
BHP Group Limited (BHP), a commodities leader, earns a Quality rating of 6.6 with an intrinsic value of $65.8, highlighting undervaluation in the resources sector. With a Market Cap of $175.7B, Revenue of $107.3B, and Free Cash Flow of $20.7B, BHP demonstrates scale and cash prowess despite Revenue growth of 10.1%. Its FCF margin of 19.3%, Gross margin of 48.7%, and top-tier ROIC of 28.5% underscore operational strength, complemented by a solid 1Y Return of 40.9%. This positions BHP as a key stock pick for commodity exposure with high returns on capital.
The metrics suggest BHP's resilience in cyclical markets, offering educational insights into value plays with strong free cash flow generation.
Key Catalysts
- Strong ROIC of 28.5% and FCF of $20.7B for reinvestment potential.
- 1Y Return of 40.9%, reflecting commodity demand recovery.
- Massive revenue base of $107.3B provides diversification across metals and mining.
- Manageable Total Debt to Equity of 46.9% relative to peers.
Risk Factors
- Revenue contraction of 10.1%, tied to volatile commodity prices.
- Cyclical sector exposure to global economic slowdowns.
- Potential regulatory pressures on mining operations.
Stock #3: Unilever PLC (UL)
| Metric | Value |
|---|---|
| Market Cap | $168.1B |
| Quality Rating | 7.1 |
| Intrinsic Value | $109.1 |
| 1Y Return | 18.2% |
| Revenue | €120.1B |
| Free Cash Flow | €14.5B |
| Revenue Growth | 2.5% |
| FCF margin | 12.1% |
| Gross margin | 71.3% |
| ROIC | 32.1% |
| Total Debt to Equity | 160.7% |
Investment Thesis
Unilever PLC (UL) achieves a high Quality rating of 7.1 and intrinsic value of $109.1, indicating strong undervaluation in consumer staples. Featuring a Market Cap of $168.1B, Revenue of €120.1B, and Free Cash Flow of €14.5B, UL shows positive Revenue growth of 2.5% and exceptional Gross margin of 71.3%. Its ROIC of 32.1% and FCF margin of 12.1% highlight efficiency, even with a modest 1Y Return of 18.2% and Total Debt to Equity of 160.7%. UL serves as an educational example of defensive quality in everyday consumer goods.
These fundamentals make UL a stable anchor for undervalued stocks portfolios seeking margin resilience.
Key Catalysts
- Leading Quality rating of 7.1 and high Gross margin of 71.3%.
- Steady Revenue growth of 2.5% in a mature sector.
- ROIC of 32.1% supports sustained profitability.
- Global brand strength driving consistent cash flows.
Risk Factors
- Total Debt to Equity at 160.7%, sensitive to interest rate hikes.
- Moderate 1Y Return of 18.2% amid consumer spending shifts.
- Currency fluctuations impacting euro-denominated results.
Stock #4: The Travelers Companies, Inc. (TRV)
| Metric | Value |
|---|---|
| Market Cap | $62.2B |
| Quality Rating | 6.6 |
| Intrinsic Value | $609.9 |
| 1Y Return | 16.1% |
| Revenue | $48.8B |
| Free Cash Flow | $7,921.0M |
| Revenue Growth | 5.2% |
| FCF margin | 16.2% |
| Gross margin | 36.9% |
| ROIC | 40.0% |
| Total Debt to Equity | 28.2% |
Investment Thesis
The Travelers Companies, Inc. (TRV) holds a Quality rating of 6.6 with an elevated intrinsic value of $609.9, pointing to deep undervaluation in insurance. Key metrics include Market Cap of $62.2B, Revenue of $48.8B, Free Cash Flow of $7,921.0M, and Revenue growth of 5.2%. Strong ROIC of 40.0%, FCF margin of 16.2%, and low Total Debt to Equity of 28.2% bolster its profile, alongside a 1Y Return of 16.1%. TRV exemplifies high-ROIC financials for stock watchlist consideration.
This analysis underscores TRV's balance sheet strength and capital efficiency in property-casualty insurance.
Key Catalysts
- Exceptional ROIC of 40.0% and solid Revenue growth of 5.2%.
- Healthy FCF margin of 16.2% for shareholder returns.
- Low Total Debt to Equity of 28.2% enhances stability.
- Consistent performance in a resilient sector.
Risk Factors
- Gross margin of 36.9% vulnerable to catastrophe claims.
- Modest 1Y Return of 16.1% in competitive insurance markets.
- Interest rate sensitivity on investment portfolio.
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Stock #5: Diageo plc (DEO)
| Metric | Value |
|---|---|
| Market Cap | $51.0B |
| Quality Rating | 6.5 |
| Intrinsic Value | $102.9 |
| 1Y Return | -22.5% |
| Revenue | $34.2B |
| Free Cash Flow | $4,427.8M |
| Revenue Growth | 5.1% |
| FCF margin | 12.9% |
| Gross margin | 60.2% |
| ROIC | 30.3% |
| Total Debt to Equity | 184.3% |
Investment Thesis
Diageo plc (DEO) scores a Quality rating of 6.5 with intrinsic value of $102.9, offering value in beverages. It features Market Cap of $51.0B, Revenue of $34.2B, Free Cash Flow of $4,427.8M, and Revenue growth of 5.1%. Metrics like FCF margin 12.9%, Gross margin 60.2%, and ROIC 30.3% shine, despite a 1Y Return of -22.5% and Total Debt to Equity of 184.3%. DEO provides insights into premium consumer brands with growth potential.
Key Catalysts
- Strong ROIC of 30.3% and Gross margin of 60.2%.
- Revenue growth of 5.1% from premium spirits demand.
- Brand moat supporting long-term cash flows.
- Recovery potential post recent underperformance.
Risk Factors
- Negative 1Y Return of -22.5%, reflecting market headwinds.
- High Total Debt to Equity of 184.3%.
- Consumer slowdown in discretionary spending.
Stock #6: Ameriprise Financial, Inc. (AMP)
| Metric | Value |
|---|---|
| Market Cap | $49.2B |
| Quality Rating | 5.9 |
| Intrinsic Value | $1,425.0 |
| 1Y Return | -2.5% |
| Revenue | $18.9B |
| Free Cash Flow | $5,536.0M |
| Revenue Growth | 5.4% |
| FCF margin | 29.3% |
| Gross margin | 54.0% |
| ROIC | 27.7% |
| Total Debt to Equity | (3.4%) |
Investment Thesis
Ameriprise Financial, Inc. (AMP) has a Quality rating of 5.9, intrinsic value of $1,425.0, Market Cap $49.2B, Revenue $18.9B, and Free Cash Flow $5,536.0M. With Revenue growth 5.4%, top FCF margin 29.3%, Gross margin 54.0%, ROIC 27.7%, and negative Total Debt to Equity -3.4%, it stands out despite 1Y Return -2.5%. AMP highlights wealth management's cash generation.
Key Catalysts
- Highest FCF margin at 29.3% among peers.
- Negative debt levels for financial flexibility.
- Steady Revenue growth of 5.4%.
- Strong ROIC of 27.7%.
Risk Factors
- Lower Quality rating of 5.9.
- Recent 1Y Return decline of -2.5%.
- Market volatility impacting assets under management.
Stock #7: Ambev S.A. (ABEV)
| Metric | Value |
|---|---|
| Market Cap | $43.8B |
| Quality Rating | 7.2 |
| Intrinsic Value | $2.3 |
| 1Y Return | 49.5% |
| Revenue | R$90.5B |
| Free Cash Flow | R$20.6B |
| Revenue Growth | 9.8% |
| FCF margin | 22.8% |
| Gross margin | 51.8% |
| ROIC | 25.3% |
| Total Debt to Equity | 3.1% |
Investment Thesis
Ambev S.A. (ABEV) leads with Quality rating 7.2, intrinsic value $2.3, Market Cap $43.8B, Revenue R$90.5B, Free Cash Flow R$20.6B, and robust Revenue growth 9.8%. FCF margin 22.8%, Gross margin 51.8%, ROIC 25.3%, low Total Debt to Equity 3.1%, and 1Y Return 49.5% make it a growth standout in beverages.
Key Catalysts
- Top Quality rating 7.2 and Revenue growth 9.8%.
- Strong 1Y Return of 49.5%.
- Low debt at 3.1% for emerging market plays.
- High FCF in local currency.
Risk Factors
- Currency risks from R$-denominated metrics.
- Emerging market economic volatility.
- Competitive beer industry dynamics.
Stock #8: Prudential plc (PUK)
| Metric | Value |
|---|---|
| Market Cap | $43.3B |
| Quality Rating | 6.6 |
| Intrinsic Value | $23.8 |
| 1Y Return | 96.0% |
| Revenue | $26.7B |
| Free Cash Flow | $3,224.9M |
| Revenue Growth | 22.6% |
| FCF margin | 12.1% |
| Gross margin | 52.5% |
| ROIC | 329.2% |
| Total Debt to Equity | 27.4% |
Investment Thesis
Prudential plc (PUK) scores Quality rating 6.6, intrinsic value $23.8, Market Cap $43.3B, Revenue $26.7B, Free Cash Flow $3,224.9M, explosive Revenue growth 22.6%, FCF margin 12.1%, Gross margin 52.5%, extraordinary ROIC 329.2%, and 1Y Return 96.0%. Low Total Debt to Equity 27.4% enhances appeal.
Key Catalysts
- Massive ROIC 329.2% and Revenue growth 22.6%.
- Stellar 1Y Return 96.0%.
- Asia-focused growth in insurance.
- Balanced debt profile.
Risk Factors
- Geographic concentration risks.
- High growth sustainability questions.
- Regulatory changes in key markets.
Stock #9: The Hartford Financial Services Group, Inc. (HIG)
| Metric | Value |
|---|---|
| Market Cap | $36.9B |
| Quality Rating | 7.1 |
| Intrinsic Value | $139.8 |
| 1Y Return | 20.2% |
| Revenue | $28.2B |
| Free Cash Flow | $3,991.0M |
| Revenue Growth | 6.9% |
| FCF margin | 14.1% |
| Gross margin | 24.8% |
| ROIC | 41.5% |
| Total Debt to Equity | 23.0% |
Investment Thesis
The Hartford Financial Services Group, Inc. (HIG) has Quality rating 7.1, intrinsic value $139.8, Market Cap $36.9B, Revenue $28.2B, Free Cash Flow $3,991.0M, Revenue growth 6.9%, FCF margin 14.1%, ROIC 41.5%, and low Total Debt to Equity 23.0%. 1Y Return 20.2% adds steadiness.
Key Catalysts
- High ROIC 41.5% and Quality rating 7.1.
- Consistent Revenue growth 6.9%.
- Low debt supports returns.
- Proven insurance track record.
Risk Factors
- Lower Gross margin 24.8%.
- Claims cycle volatility.
- Economic sensitivity.
Stock #10: Telefonaktiebolaget LM Ericsson (publ) (ERIC)
| Metric | Value |
|---|---|
| Market Cap | $36.1B |
| Quality Rating | 6.8 |
| Intrinsic Value | $20.2 |
| 1Y Return | 39.9% |
| Revenue | SEK 235.3B |
| Free Cash Flow | SEK 29.0B |
| Revenue Growth | (5.1%) |
| FCF margin | 12.3% |
| Gross margin | 47.8% |
| ROIC | 23.5% |
| Total Debt to Equity | 41.8% |
Investment Thesis
Telefonaktiebolaget LM Ericsson (publ) (ERIC) earns Quality rating 6.8, intrinsic value $20.2, Market Cap $36.1B, Revenue SEK 235.3B, Free Cash Flow SEK 29.0B, despite Revenue growth 5.1%. FCF margin 12.3%, Gross margin 47.8%, ROIC 23.5%, Total Debt to Equity 41.8%, and 1Y Return 39.9% highlight telecom value.
Key Catalysts
- Solid 1Y Return 39.9%.
- Strong ROIC 23.5% in 5G transition.
- Scale in SEK revenue.
- Recovery from revenue dip.
Risk Factors
- Negative Revenue growth 5.1%.
- Telecom capex cycles.
- SEK currency exposure.
Portfolio Diversification Insights
These 10 best stock picks offer balanced sector allocation: financials/insurance (SAN, TRV, AMP, PUK, HIG ~40%), commodities (BHP ~15%), consumer staples/beverages (UL, DEO, ABEV ~25%), and telecom (ERIC ~10%). High-ROIC leaders like TRV 40.0% and HIG 41.5% complement cash-rich giants like SAN ($20.1B FCF) and BHP ($20.7B FCF). Growth from ABEV 9.8% and PUK 22.6% offsets cyclicals, reducing correlation risks. Quality ratings average ~6.7, with undervaluation across the board (e.g., TRV's $609.9 intrinsic), ideal for diversified stock watchlists emphasizing stability and value.
Market Timing & Entry Strategies
Consider positions during sector rotations toward value, such as post-earnings dips or when intrinsic value gaps widen (e.g., SAN at $17.3). Monitor ROIC stability above 25% and FCF margins; enter on pullbacks in high-return names like PUK (96.0% 1Y). Use dollar-cost averaging for cyclicals like BHP, targeting economic recoveries. Track macroeconomic cues like rates impacting debt-heavy picks (SAN 288.1%). This analysis aids timing investment opportunities without prescribing actions.
Explore More Investment Opportunities
For investors seeking undervalued companies with high fundamental quality, our analytics team provides curated stock lists:
📌 50 Undervalued Stocks (Best overall value plays for 2025)
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📌 50 Undervalued Growth Stocks (High-growth potential with strong fundamentals)
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FAQ Section
How were these stocks selected?
These top stocks were chosen via ValueSense's Magic Formula screening, prioritizing high ROIC (avg. 28%+), quality ratings (5.9-7.2), strong FCF margins (>12%), and undervaluation per intrinsic value estimates.
What's the best stock from this list?
Standouts include ABEV (7.2 quality, 49.5% 1Y return) for growth and TRV (40.0% ROIC) for efficiency; selection depends on portfolio needs like sector balance.
Should I buy all these stocks or diversify?
Diversification across financials, commodities, and staples (as shown) mitigates risks; allocate based on risk tolerance rather than concentrating in one area.
What are the biggest risks with these picks?
Key concerns: high debt (e.g., SAN 288.1%), revenue declines (BHP -10.1%), and sector cycles; balance with strong ROIC and FCF for resilience.
When is the best time to invest in these stocks?
Optimal during undervaluation expansions or sector tailwinds, like commodity rebounds for BHP or rate stability for insurers; use ongoing analysis for entry points.