5 'Magic Formula' Stocks for 2013

CA Technologies is in good financial shape, with a deep net cash position that accounts for nearly a tenth of CA's market capitalization. The firm also scored very well under the magic formula screen, generating the same score as the first two names on our list.

Hewlett-Packard

Another technology company that may seem surprising to find on the magic formula list is Hewlett-Packard (HPQ). H-P has seen its share price get halved over the course of 2012, as major missteps keep aggravating investors and giving sellers and opportunity to unload shares. The most recent mess-up comes from H-P's purchase of software firm Autonomy, which resulted in a multi-billion dollar write down of around 80% of the deal price. Poor acquisition choices are always a risk for firms with large cash positions -- H-P's $11.3 billion in cash would probably be better used paying down debt than buying its way into new businesses.

While H-P is synonymous with the computer business, PC-makers are realizing that building computers isn't the place to be anymore. With PC prices becoming increasingly commoditized, H-P is struggling to find service revenue to fill the profitability gap, and competition is coming from all sides. H-P's enterprise division has a big advantage through its relationships with corporate IT departments, but big rivals like Dell (DELL) boast similar customer Rolodexes.

I think it's premature to expect the cash bleed to stop right away for this firm -- especially with management conceding that more write-downs on Autonomy may be on the way. While H-P ranks high on the magic formula screen, it's the one name that I'd recommend avoiding for qualitative reasons.

AutoZone

Meanwhile, car parts retailer AutoZone (AZO) has a lot going for it. The firm is the biggest auto part retailer in North America, with a network of around 4,685 stores stateside and another 321 stores in Mexico. Right now, big macro tailwinds are providing a huge opportunity for AutoZone -- with the average car age in the U.S. higher than it's ever been before, drivers are looking to prolong the roadworthiness of their cars by repairs. That rising tide of car part spending should help lift all ships in the industry.

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