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Tickers in this Article: SHLD, MI, SLE, GIS, GS, GOOG, YHOO, KFT, TGT, WMT
Most investors are familiar with the term "best of breed." Put simply, buying the best of breed means picking the best stocks in the strongest sectors. This strategy has proven successful time and time again and history will likely continue to vindicate it for decades to come.

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Unfortunately, some investors don't follow the market's time-tested axioms and eschew the best of breed for a sector's second-tier names. To be sure, there are times when a sector becomes so beloved by investors that even the weakest links go along for a ride. Passing on the best of breed can work for a little while, but the market always find a way to separate the men from the boys.

When investment banks were hot, you could've passed on Goldman Sachs (NYSE: GS) in favor of Bear Stearns or Lehman Brothers, but that wouldn't have worked out so well. Likewise, you could've passed on Google (Nasdaq: GOOG) in favor of Yahoo (Nasdaq: YHOO) if you invest tech, but that wouldn't have been a rewarding bet either.

Of course, to avoid the worst of breed, you need to know who they are. Here are three from three different sectors.
Company 52-Wk Performance Forward P/E
Sears Holdings (Nasdaq: SHLD) -32% 41
Marshall & Ilsley (NYSE:MI) -57% N/A
Sara Lee (NYSE: SLE) -30% 9.5

A Big Bet Gone Wrong
Just four years ago the hedge fund wizard Eddie Lampert acquired a big chunk of Sears Holdings that now totals 55%. Investors were amped about the news as Lampert had a reputation for making prescient bets in a variety of sectors. Some even called him the next Warren Buffet. Unfortunately for investors, the expectations have far outweighed the results.

In the past two years, Sears Holdings is down almost 60% compared to 20% for Target (NYSE: TGT) and a 20% rise for Wal-Mart (NYSE: WMT). And it looks like things are going to get worse before they get better for Sears. The company reported a loss of $94 million or 79 cents a share in the second quarter after posting a profit a year earlier, and the Street was caught off-guard by the loss. Lampert has been chastised for not improving the appearance of Sears' stores to better compete with Wal-Mart and other rivals.

Lampert's critics are vocal when it comes to Sears. Morgan Stanley thinks the shares could fall to $35, and with Sears accounting for almost half of Lampert's $14 billion ESL hedge fund, the wizard is under significant pressure to work his magic. There are calls for Lampert to split Sears up and sell the well-known Craftsman and Kenmore brands, but that would be complex and time-consuming.

What is easy to discern is that if you're going to invest in retail, put your money somewhere else. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

Not So Delicious
Sara Lee makes some tasty products, but it has not been a treat for investors seeking the comforts of the defensive food sector. In fact, Sara Lee's performance has been downright offensive. In the last two years, the stock is down nearly 45% compared to a 12% drop for Kraft (NYSE: KFT) and a modest gain for General Mills (NYSE: GIS).

Don't be tempted by Sara Lee's 4.6% dividend yield; the payout is just 44 cents a year. The company said earnings will rise from 84 cents to 90 cents a share in the year ending June 30, but analysts had been expecting that number to be 91 cents a share. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

One Bad Bank
With so many stocks that just flat out stink, there is a wide assortment of names to pick from in the regional bank group that would qualify as "worst of breed." One that may qualify is Marshall & Ilsley (NYES:MI). M&I was once a reliable dividend payer, raising its payout every year for 36 straight years, but that streak ended in 2008 and the quarterly dividend went from 32 cents a share to a penny.

Elevated loan losses at the bank have led Fitch Ratings to put the bank's debt ratings on negative watch and the company's exposure to Arizona real estate has been crippling. In the second quarter MI had to sell a portfolio of 800 bad mortgages that had $297 million, and many of those loans were for Arizona properties. It could be quite a while before M&I becomes a worthwhile investment. (Nonperforming loans can be crippling for any bank, read Banking Stress Tests: Would Yours Pass? to learn how to analyze it)

Walk Away From the Worst
If there's something positive to say about a stock, we don't hold back on elaborating. That said, there's no silver lining with this trio. Each sector mentioned here has far better offerings for investors. Just walk away from the worst of breed.

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