Carlson's Fallen Angels

12/05/2003 12:00 am EST


Charles Carlson

Editor, DRIP Investor

"When I go bottom fishing, I like to focus on the worst-performing stocks in the Dow," says Charles Carlson, editor DRIP Investor, who has just published a new book entitled Winning With The Dow's Losers "Indeed, the Dow's losers in one year tend to snap back nicely in the next." Here, he looks at two favorite fallen angels. 

"Bad things can happen to good companies. Just ask Johnson & Johnson (JNJ NYSE). Despite turning in solid profit results, the stock has been a laggard this year. What went wrong? Well, for starters, Wall Street has been frigid toward big pharmaceuticals. Concerns over generic competition, the lack of blockbuster drugs, and a political climate clearly favoring generics at the expense of big brand-name drug producers have cast a pall over the group. The stock is down sharply from its 2002 high of nearly $66. JNJ is discounting a lot of bad news at this time and any positive surprise should provide a big lift to the stock.

"Another fallen angel that has had rough sledding in recent years is Walt Disney (DIS NYSE). The stock trades at a steep discount from its peak in 2000 of nearly $44. For Disney, an improved economy and a rebound in employment should spur travel to the company’s theme parks. Disney was also in the news recently when Roy Disney called for the resignation of Michael Eisner. The two have feuded in the past, and I don't see a management shakeup coming as a result of the latest squabble. I continue to like Disney and would feel comfortable buying at current prices.

" An additional reason why these two fallen angels should do better in 2004 is the market rotation I foresee during 2004. The market rally of 2003 has been led primarily by the smallest, most aggressive stocks. Such price action from the most speculative stocks is not unusual during the first leg of a new bull market. Over time, however, as the rally matures, money usually moves out of these aggressive stocks into larger, higher-quality issues. I expect that rotation to occur in 2004, which means more money will flow into quality stocks such as Disney and Johnson & Johnson. Thus, for investors who want to add quality stocks with their best gains still ahead, I would suggest taking a good look at these two issues.

For investors interested in dividend reinvestment plans, Carlson adds, "Disney stock can be bought directly from the company, the first share and every share. For enrollment information call (818) 553-7200. Johnson and Johnson has a traditional dividend reinvestment plan in which an investor must already be a shareholder of at least one share. For information on its DRIP call (800) 328-9033."

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