What investors can learn from this large cap stock’s troubles

To cut your investing risk, we recommend following our three-part system: Hold mostly high-quality, dividend-paying stocks, spread your money out across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; Utilities) and avoid or downplay stocks in the broker/public relations limelight.

How “in-the-limelight” stocks can hurt your portfolio

Even well-established large cap stocks (or shares of larger-sized companies) can stumble. That’s especially true when they’re in what we call the broker/public relations limelight. Investors can build up unrealistic expectations when stocks spend time in that limelight. When broker/public-relations favourites fail to live up to those expectations, they drop much further than they would have if they had been less widely followed.

Toyota (symbol TM on New York) provides an example. The large cap stock’s shares have fallen roughly 19% since mid-January. That’s when the company announced a recall of 8.5 million cars to fix problems that could lead to sudden acceleration.

The cars’ gas pedals could get stuck in the downward position, or their floor mats could get trapped under their gas pedals. Toyota is also recalling hybrid cars for brake problems.

The company estimates that the gas-pedal recall will cost it up to $2 billion. To put this figure in context, Toyota earned $1.7 billion in its third quarter, which ended December 31, 2009.

Prior to the recall, Toyota was an example of what we would call a “priced-to-perfection” stock. The company was frequently the subject of positive news articles about its hybrid technology, positive labour relations and so on. For these reasons, Toyota shares were priced as though the company did not face any of the same challenges as other automakers, such as GM and Chrysler.

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We’ll keep you up to date on the road ahead for Toyota

We’ve been following Toyota’s troubles closely, and keeping our subscribers up to date on the stock in our Wall Street Stock Forecaster issues and hotlines.

The U.S. Congress is now investigating the large cap stock’s response to the safety concerns surrounding its vehicles. It’s possible that the U.S. government will issue stricter safety rules in response to the recalls.

The recalls have caused significant problems for Toyota. And of course, the company would have to comply with any new safety regulations from the U.S. government. However, these new measures would also apply to other carmakers.

Our three-part program helps protect you from volatility

Toyota is far from the only “in the limelight” stock that could suffer on negative news. Companies like Apple Inc. (symbol AAPL on Nasdaq) or Research in Motion (symbol RIM on Toronto) are also leaders in their industries, but their place in the broker/public relations limelight does leave them vulnerable to sharp declines when they run into trouble. But if you stick with our three-part program, these stocks will only make up a small part of your overall holdings.

We take a close look at Toyota’s competitive position and its options for dealing with the recall in the current Wall Street Stock Forecaster. This issue also gives you all the information you need to respond to the situation, and gives you our clear buy/sell/hold advice on the stock.

Best of all, you can get this issue of Wall Street Stock Forecaster absolutely free. Click here to learn how.