Look past popularity


One reason we like the Quadrix® stock-rating system is that it doesn’t care what anybody else thinks.

Preconceived notions can be just as hazardous to your wealth as inflation or economic weakness. And we all have gaps in perspective that affect our investment decisions.

No quantitative system is perfect, and sometimes we will zig when Quadrix says to zag if our individual analysis suggests the statistics don’t tell the whole story. But since we began using Quadrix to select stocks in 2000, we have found it very useful for picking winners.

Studies have shown that investors tend to get attached to stocks they own. All too often that creates a reluctance to sell. There is no such thing as a perennial Buy, and stagnant portfolios are likely to lag over time as component companies falter. Fortunately, Quadrix can help.

Our Quadrix system considers more than 100 statistics, none of which measures the popularity of a stock. Quadrix scores are percentile ranks, with 100 the best. To find out what Quadrix says about investors’ favorites, we collected Quadrix scores on the 40 most widely held stocks, as listed by The Wall Street Journal.

The Forecasts covers all but three of those stocks — our Monitored List is designed to contain most of the important stocks in the U.S. market, not just companies we like. Most of the poor scorers earn Neutral ratings, though a few of the worst are rated Underperform. Remember that Neutral is not a recommendation to hold a stock. Subscribers tracking our Focus List, Buy List, or Long-Term Buy List should in most cases sell a Neutral. In all cases, sell your Underperforms.

Below we discuss two popular stocks we like, and two we don’t.

Two we like
Several factors explain why Johnson & Johnson ($67; NYSE: JNJ) is one of the most widely held stocks, as well as one of our recommendations. J&J has averaged 10% annual earnings growth over the last 100 years, and sales have increased for 75 consecutive years. Also, the company has increased its dividend every year for the last 45 years. While J&J isn’t likely to deliver huge growth, over the years it has been as steady as they come, operating a diversified mix of businesses with limited cyclicality.

J&J faces some challenges in 2008. Generic competition and safety issues have hurt sales at the pharmaceutical division. Drug sales rose just 4% last year and 3% in the March quarter. The patent for Risperdal, J&J’s best-selling drug, expires in June. And the Food and Drug Administration restricted the use of anemia drug Procrit in March. Sales of drug-coated stents have also fallen on safety concerns.

Still, J&J offers some defense against a slow economy. The company has a deep pipeline of drugs and medical devices awaiting approval this year and through 2010. J&J enjoys a strong presence in emerging markets and expects to grow sales in China, Russia, and India at double-digit rates over the next eight years. J&J is a Buy and a Long-Term Buy.

Legendary investor Warren Buffett’s investment company owned 8.5% of Wells Fargo ($29; NYSE: WFC) at the end of 2007. Buffett is known for instructing investors to be fearful when others are greedy and greedy only when others are fearful — and Wells Fargo is also known for taking that approach.

In 2004, Wells Fargo began tightening underwriting standards for its home-equity loans, maintaining that discipline when mortgage rates stayed low. Now that prices are higher and competitors are ailing, Wells Fargo sees plenty of opportunity to boost market share. Despite the company’s exposure to the ailing California housing market, Wells Fargo’s loan portfolio is stronger than that of most peers. At the end of March, nonperforming loans represented 0.84% of total loans, up from 0.54% of total loans in the year-earlier period but well below the 1.5%-plus seen at many other banks. The bank has avoided the riskiest mortgage loans and derivatives, leaving it with solid balance sheet.

Wells Fargo’s Quadrix Overall score has fallen to 47, hurt by weak operating results and falling earnings estimates. But the shares look cheap at 12 times the 2008 consensus profit estimate, and over the next two to three years the market should reward Wells Fargo for its quality. Wells Fargo is a Long-Term Buy.

Two we don’t like
In March, shares of Ford Motor ($8; NYSE: F) fell below $5 to their lowest point in at least 20 years. The company lost money in 2006 and 2007 and is expected to do so again this year.

Ford’s car sales fell almost 8% in March, and the vehicles that do sell are fuel-efficient cars, rather than the more profitable trucks and SUVs that still account for about two-thirds of revenue in North America. A sustained switch to more economical cars is likely to hurt results over the next few years.

High gas prices and the weakening economy are likely to maintain downward pressure on Ford’s sales. And while cost cuts are the key to Ford’s return to profitability, rising prices for such raw materials as steel and plastic are making it difficult to cut expenses. Ford is rated Underperform.

Motorola ($9; NYSE: MOT) shares have steadily declined from October highs, losing more than 5% of their value. The communications-equipment maker appears to be losing share in the cell-phone market. Motorola nearly doubled its market share in the 18 months after the release of its RAZR phone in 2005 but has struggled to maintain consumer interest in the last year, hurt by the lack of a strong follow-up product.

In the last six months, the company replaced its CEO, announced plans to spin off its troubled handset division, and agreed to seat two board members recommended by activist investor Carl Icahn. At current levels, Motorola may tempt investors to bet on a turnaround. But the challenges are significant. The new board members could hamper, instead of facilitate, decisionmaking, delaying the spin-off. And given the fundamental problems with both Motorola’s handset unit and the cell-phone market itself, even a spin-off is no panacea. Motorola is rated Neutral.

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