It's something many have heard but few understand. You might know that a Fortune 500 company is a giant of American business, but how are these companies selected? There is plenty of fascinating information about the Fortune 500 list. Let's take an in-depth look at the list that most people have heard of but few know about in detail.

What Is the Fortune 500?
The Fortune 500 is a list compiled by Fortune magazine that lists the top 500 U.S.-based public and closely held companies as measured by gross revenue. The list is widely regarded as the 500 most powerful companies that define American business. The Fortune 500 list might be the best known but Fortune also publishes the Global 500, which opens the list to companies worldwide. Other lists, like the Forbes Global 2000, list the world's 2000 largest public companies.

How Are Companies Selected?
According to Fortune, companies are ranked by total revenue during their fiscal year. Only companies that are incorporated, operate in the United States and file financial statements with a government agency are eligible.

Not all companies on the list are publicly traded. Private companies that file a 10-K or other financial statement are eligible, as well as mutual insurance companies that file with the appropriate state regulator.

In order to make the list, a company cannot be a subsidiary. For example, Geico Auto Insurance is not eligible for the list because it is owned by Berkshire Hathaway (NYSE:BRK-B).

Notable Changes to the List
Walmart Regains Top Spot
After falling to number two on the list last year, Walmart (NYSE:WMT) overtook Exxon (NYSE:XOM) to become the top company in 2013. The retailer returned to its low-pricing roots, which boosted sales 5.9% in 2012.

Phillips 66 Debuts at Number Four
People were scratching their heads when they saw who held the fourth spot. Phillips 66 (NYSE:PSX) was ConocoPhillips' (NYSE:COP) refining arm until it was separated from the exploration arm last year. Its $169.5 billion in sales was good enough for the number four spot.

Apple Is Finally in the Top 10
How does the largest company in the United States by market cap only now crack the top 10? Because Apple's (Nasdaq:AAPL) 2012 revenue was only $108.2 billion compared to number one, Exxon, which had $452.9 billion. This year, the number shot up to $156.5 billion. When it comes to revenue, Apple would have to sell a lot more iDevices to keep up with an oil company.

Eastman Kodak Didn't Make the List
For the first time since the list started in 1955, Eastman Kodak failed to make the list. The company remains in bankruptcy and has plans to issue new stock, essentially making it a new company and leaving existing shareholders wiped out, according to USA Today.

Interesting Facts from the 2013 List
  • Only 57 Companies Left - According to Fortune, only 57 companies have been on the list every year since it began in 1955.
  • The Youngest CEO Is - You guessed it, Facebook's (Nasdaq:FB) Mark Zuckerberg.
  • If All Fortune 500 Companies Were a Country - It would be the second largest country in the world, as measured by total sales of the companies versus the GDP of those countries.
The List as an Economic Indicator
A list this large and exhaustive is sure to attract academic research and it has. A common metric used in conjunction with the Fortune 500 list is churn - the amount of turnover on the list. How many companies that were once on the list have been replaced? Only 11% of the inaugural companies are still on the list.

This, according to some researchers and economists, is a positive sign. It points to innovation as new companies rise up as they meet the needs of an evolving economy, but others aren't so sure. In a 2012 study sponsored by the Kauffman Foundation titled, What Does Fortune 500 Turnover Mean?, authors Dane Stangler and Sam Arbesman argue that it's cause for concern.

According to the study, during the 1950s, turnover was moderate but by the 1980s, turnover rose to historically high levels and by the mid-1990s, it reached new highs. After 2000, it returned to moderate levels. According to the authors, "… in the 1990s, higher turnover reflected (a) methodological changes in how the Fortune list was compiled, and (b) a mergers and acquisition boom, concentrated in a handful of sectors that destroyed perhaps as much value as it created."

In other words, high rates of churn don't necessarily mean that newer companies are getting stronger. It can also mean that some companies are no longer eligible or were swallowed up by bigger companies.

Take Action
How can an investor use the Fortune 500 list as a research tool? Because companies on the list represent health and stability, many pay a dividend. Income investors looking for names to add to their portfolio should consult this list for new ideas.

Options traders know that while many companies are obtainable, many are too thinly traded on the options market to remain liquid. For this reason, options traders may look for larger companies with more options volume. The Fortune 500 list will provide a wealth of new ideas.

Use it as a means to cut through media noise. Take Apple, for example. You don't have to search very long to find an article about how Apple has lost its edge, but its move to number six on the list was the result of a 44% increase in revenue, according to the report. That may prompt you to ask, "does that sound like a company that is no longer what it once was?" There may be more to the number once you do further research but using the list to form questions makes it invaluable.

At the time of writing, Tim Parker did not own any shares in any company mentioned in this article.

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