5 'Magic Formula' Stocks for 2013

Expedia Inc.

It's been a stellar year for the world's largest online travel agent, Expedia Inc. (EXPE) -- shares of the $8 billion travel firm have more than doubled since the first trading day of January. But this firm could have a lot further to run according to Greenblatt's magic formula -- this stock scored above the 90th percentile for both return on capital and earnings yield.

Expedia provides bookings for everything from air travel and hotels to rental cars, cruises, and package tours. The firm also owns Hotels.com, Hotwire, and China's eLong.com, in addition to its popular, namesake site. Expedia's early claim to fame was cost; by offering the lowest possible prices on travel, the firm was one of the pioneers in the online travel industry. Today, though, travel fares have largely become commoditized, with "lowest fare guarantees" contractually obligated between carriers and travel bookers like Expedia. That means that the firm now has to rely more on added features on its website (like reviews and package deals) to court travel dollars.

But it's not just dollars that Expedia is courting. Today, international markets make up more than a third of EXPE's total bookings, a big enough chunk to materially reduce the firm's exposure to the cyclical U.S. travel business, but a small enough chunk that it hasn't been overly hurt by a strong dollar. Travel prices are much less commoditized in markets like China, where EXPE can get deeper margins and grow its top line materially over the next few years. That should keep those magic formula metrics growing going forward.

CA Technologies

Enterprise IT firm CA Technologies (CA) provides information technology management software to firms that are focused on securing that administering their networks. That's been a lucrative business in the last few years, as increasingly connected computer infrastructure and upticks in enterprise IT spending give CA a bigger pool of customers to draw from.

CA's expertise in mainframe computers gives it a big edge in providing services for huge IT departments. Because mainframes are extremely expensive, IT departments tend to be less sensitive to the costs of deploying software on them, giving CA some meaningful pricing power as IT administrators look to protect their massive investments. CA has also done a good job of positioning itself in line big trends in IT right now, namely cloud computing and virtualization. As those technologies continue to grow in popularity in corporate America, CA should continue to push its sales numbers higher, particularly with a customer list that already includes 99% of the Fortune 1000.

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