Large-Cap Laggards May Catch Up

07/12/2007 12:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of the Turnaround Letter, finds some underperforming large-cap stocks he thinks will do well as big caps revive.

Consensus thinking isn’t normally our bailiwick, but every now and then we do agree with a widely accepted opinion. A case in point is our view that large-cap stocks are likely to outperform for a while.

But then when we look at which large-cap stocks to buy, our contrariness kicks in again. Most investors want to jump aboard the stocks that have performed the best recently. We prefer to focus on the worst performers.

That led us to look at the stocks in the Standard & Poor’s 500 index that have performed the worst over the last three years. We concentrated on underperformers that currently pay a dividend. Dividends reward you even if you have to wait a while for a stock to appreciate, [and] they will reduce a stock’s downside volatility if the market hits a rough patch. The stocks discussed below are [some of the] worst performers in the S&P 500 since June 30, 2004.

The New York Times (NYSE: NYT) and Gannett (NYSE: GCI) have struggled as their traditional newspaper markets shrink. Both companies are scrambling to build their Internet presence and other businesses to offset the decline in newspaper readership. Both companies have strong franchises, however, and there continues to be strong interest in the information business, as evidenced by News Corp.’s efforts to acquire Dow Jones. (New York Times closed just below $24 and Gannett closed above $54 Wednesday—Editor.)

Marsh & McLennan (NYSE: MMC), a leading global provider of insurance, reinsurance, and risk consulting services, is recovering from a series of regulatory missteps that severely distracted management. The company’s image remains a bit tarnished, and profitability has yet to recover, but steps are underway to turn operations around. The sale of the company’s investment management unit for nearly $4 billion will give management more financial muscle. If results do not improve soon, the company could be a buyout target. (Marsh closed just below $31 Wednesday—Editor.)

Jones Apparel Group (NYSE: JNY) designs and markets women’s apparel under a range of leading brands including Jones New York, Nine West, Anne Klein, Gloria Vanderbilt, and Evan-Picone. Operations, though profitable, have struggled a bit lately as department stores have sought to develop their own brands. The company recently sold its Barneys New Yorkretail operation, thereby reducing capital needs and improving financial flexibility. Jones was unsuccessfully peddled to a private equity firm last year, but with its strong brands, it could re-emerge as a takeover candidate. (The stock closed just above $28 Wednesday—Editor.)

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