2 S&P 500 Stocks to Avoid and 2 to Obtain

Includes: ANF, HRB, LUV, MMM
by: Larry Meyers

Many investors hold some version of the S&P 500 in their portfolios, as a proxy for holding the broad market. I like this diversification option, whether it is in the form of an index mutual fund or ETF. However, this also means you have to take along the bad with the good. It's not a bad idea to "double up" on the best S&P stocks -- buying a few individual great stocks, while shorting a few stinkers. I can and will, choose many. But here's some to start.

I see two names that I would consider shorting at this time. The first is H&R Block (NYSE:HRB). The company is a brand-name in the tax preparation business, but that product has since become commoditized. With thousands of franchised tax prep servies now in the country, plus software competitors and now internet competitors, the company's bread and butter is under assault. Even worse, the tax refund anticipation loan business -- an extremely profitable part of H&R Block -- was unfairly regulated out of business by the Obama Administration's ridiculous stance on these loans. The company is losing tons of money this year so far and its first quarter will be weaker next year.

I think Abercrombie & Fitch (NYSE:ANF) has had its run. The company stock has increased five fold since late 2008. This has happened even though profits have been chopped to pieces, cash flow has weakened and retail numbers begin to soften. Plus, youth retail is notoriously fickle. I don't see the company going out of business, but the stock is overextended. It's trading at a 32x P/E while growing earnings at 20%, which is not going to last given recent retail sales reports.

On the flip side, Southwest Airlines (NYSE:LUV) is the place to be. It is the most successful airline in history, well-managed, with more cash than debt, profitable even during the Great Recession and has strong cash flow. The stock is 50% off its historic high and I think it's a long-term hold and a bargain at $11.

Somehow, 3M (NYSE:MMM) just keeps on chugging. The reason is because the company makes so many household goods that everyone uses on a daily basis that, recession or not, they will still use on a daily basis. The company had net income in the billions during the recession, along with billions in free cash flow and has even more billions in cash on its balance sheet. It's products are ubiquitous and that won't change. Add in a 2.4% dividend and it's a must-hold.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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