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Last week I highlighted Wall Street's 10 best reward/risk companies. But with an average market value of just $1.4 billion each, most of these names are too small for institutional investors to own. So in this column we turn our attention to the S&P 500's top scorers, which boast an average market value of $23 billion each. Now that's big.
 How to find these kinds of companies? Our process is to estimate how many points a stock will rise if it reaches our estimate of intrinsic value, and then divide that number by how far the stock will drop if business is temporarily bad. The resulting number is a firm's reward/risk score. The higher the score, the better. The table below shows the S&P's 10 best, after eliminating companies with overleveraged balance sheets and other blemishes. As always, these are not official recommendations but rather a starting point for further research. Our top scorer, Abercrombie & Fitch (ANF - commentary - Cramer's Take), offers $7.20 of potential profit for every dollar of risk, on the basis of its recent $25 stock price. The casual apparel retailer operates the Abercrombie & Fitch, abercrombie, Hollister and RUEHL brands. Murphy Oil (MUR - commentary - Cramer's Take) is runner-up, with a reward/risk score of 7.10 times. The El Dorado, Ark.-based oil and gas explorer and producer operates in the U.S., Canada, the U.K., Malaysia, Ecuador and internationally.
In the S&P screen, risk is estimated at tangible book, vs. 50% of tangible book in the all-company screen. The loss of a key executive or customer can send a small company into the abyss, whereas larger, more established firms have deeper management teams, better access to capital and more diversified revenue sources. The bigger the discount to tangible book you desire, the bigger a firm's risk and the smaller its reward/risk, all else equal. Also, reward/risk scores are magnified if a company has a small denominator. So I also use a second metric: risk-adjusted reward. This estimates value at risk, i.e., the dollar spread between how much money you'll make if the business grows as analysts expect and how much you'll lose if things turn ugly. The bigger the positive spread, the better. The best risk-adjusted reward companies, subject to certain quality guidelines, are below.
Ensco International (ESV - commentary - Cramer's Take) tops the list, at $114. The offshore driller to the oil and gas industry was also a top scorer in our all-company screen. Including Ensco, the S&P's best five risk-adjusted reward companies, and seven of the top 10, are in the hydrocarbon energy business. The culprit? A 50% decline in the price of WTI crude since a year ago. At current levels, these companies are attractive for patient investors. Google (GOOG - commentary - Cramer's Take) has the worst risk-adjusted reward of any S&P company, at $(304). If the income statement for this great company ever disappoints (hint: it will), then the stock has a long way to fall before reaching tangible book. Last week Google laid off 200 employees from its sales and marketing teams, raising questions about the Internet search engine's prowess in a worldwide recession.
Despite Apple's (AAPL - commentary - Cramer's Take) poor risk-adjusted reward, I am a stockholder because 1) it sells for just 8 times free cash flow, after adjusting for excess cash and interest income; 2) our family owns several "i" gadgets, and 3) the Apple Store near our home is always busy. But since Apple's stock sells at 4.3 times tangible book, I keep it on a tight leash. Dr. Michael Klein of NapaliResearch.com provided the data used in this column.
Know What You Own: Ensco's competitors include Diamond Offshore Drilling (DO - commentary - Cramer's Take) and Nabors (NBR - commentary - Cramer's Take).
At the time of publication, Heiserman was long APPL and ESV, although holdings can change at any time.Hewitt Heiserman conceived the Earnings Power Chart and the Earnings Power Staircase. A graduate of Kenyon College with distinction in history, Heiserman is a member of the Boston Security Analyst Society and the CFA Institute. He also authored It's Earnings That Count. For additional information, please visit Earnings Power. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback; click here to send him an email.TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com. Brokerage Partners
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