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One to Buy, One to Watch, One to Sell

Roger Friedman
March 8, 2011

Just because a stock is cheap doesn't mean it's attractive to value investors ... but it can certainly help. Today, Motley Fool Inside Value advisor Joe Magyer shares a company that is a solid buy, one that's worth watching, and one to get rid of as soon as humanly possible.

One to buy
When Joe recommended Procter & Gamble (NYSE: PG  ) in Income Investor two years ago, he described the consumer-brand behemoth as "a blue chip with a mile-wide moat, a 3% yield, and nearly 33% upside." Since then, the venerable company has lagged the market by more than 45 percentage points. That's only added to Joe's interest.

"They make half the things in your medicine cabinet," he says. "You're going to shave every day, people use diapers every day, they use toilet paper every day. There's no getting around that. P&G focuses on premium-priced brands for everyday needs."

Shares have fallen of late on fears of rising input costs -- let others worry about such short-term concerns, scoffs Joe -- and because the company has become more aggressive on cutting prices. Joe doesn't love the pricing move, but understands the need to maintain market share and brand loyalty in a down economy. "P&G can always return to price increases later, but for right now, they need to focus on keeping those customers locked into their brands."

One to watch
Speaking of price increases, such pricing power is one of the joys of being a member of an industry duopoly. Automatic Data Processing (Nasdaq: ADP  ) is the country's largest payroll processor, not far ahead of rival Paychex (Nasdaq: PAYX  ) , and leaps and bounds beyond any other player. Joe owns shares of Paychex and likes the company, but he's singling out ADP for its two-edged hedge on inflation.

First, the company provides huge cost savings on its payroll processing to businesses. Since the costs to switch are enormous, it can also muscle through price increases above the rate of inflation. Second, ADP earns interest on the funds it holds, from the time its clients deposit the money until ADP ships it out in the form of paychecks.

"I really like the business model of both of these companies, but they're a bit rich for me at the moment," says Joe. "I own both, but I'm not adding right now."

One to sell
Listen to Joe discuss the outlook for Nokia (NYSE: NOK  ) , and yo