4 Dow Stocks to Dump Right Now

by James Brumley | September 6, 2012 9:43 am

The Dow Jones Industrial Average’s components might be some of the market’s biggest and best-known blue-chip stocks, but just being one of the index’s 30 names doesn’t inherently make a stock worthy of owning at all times.

Here are four Dow names that you not only shouldn’t buy right now, but that some investors should consider selling in light of their growing risk:

Wal-Mart

Yes, I was the same guy who was singing the praise of Wal-Mart (NYSE:WMT[1]) back on May 24, saying WMT stock was a “buy.”[2] What changed between then and now that’s making the world’s largest retailer not so hot any longer?

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What changed is the stock’s price. In late May, Wal-Mart shares were trading at $63.73. Now they’re at $72.60, and had been as high as $75.24. (You’re welcome, by the way.) That’s a 14% gain between now and then, changing the risk-reward scenario from one that tremendously favored reward over risk to one that now offers much more risk than potential reward.

For those investors who need a little deeper explanation, the trailing P/E is now a frothy 15.3 — which is frothy for Wal-Mart, and is as high as we’ve seen it since late 2009 when the economy was in an upswing.

Just for the record, Wal-Mart’s solid earnings-growth trend hasn’t been threatened. This is all about the stock.

Procter & Gamble

It’s tough to dislike the nation’s most iconic consumer goods company. Most of us grew up with brands like Crest, Bounty and Duracell. The fact is, however, Procter & Gamble (NYSE:PG[3]) is starting to struggle more than just a little bit.

It’s not that CEO Bob McDonald doesn’t know it; McDonald is likely prepping for a proxy fight (and a fight for his job) now that Pershing Square’s chief Bill Ackman has all but telegraphed his intent to remove McDonald[4] because of tepid results from the company. The problem is, P&G is a big ship, and turnarounds don’t happen quickly for companies that are as big as Procter is and do what Procter does.

That being said, the turnaround effort is the least of P&G’s worries right now. As the market has learned from its experience with Target (NYSE:TGT[5]) and J.C. Penney (NYSE:JCP[6]), letting Ackman get involved can be distracting at best, and in the case of Penney — where Ackman actually won control of the company — the results could be disastrous. Penney is far worse off than it was before Ackman’s hand-picked CEO took over the helm at J.C. Penney.

Home Depot

To give credit where it’s due, Home Depot (NYSE:HD[7]) has ridden the wave of the real estate rebound quite masterfully. The stock’s rally, though, has greatly exceeded the magnitude of the earnings rebound.

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Just for perspective, the $2.80 per share Home Depot has earned in the past four quarters almost exceeds its peak profit of $2.83 per share in 2007. For HD to keep growing would mean the company would have to be running at an annual revenue and profit pace stronger than it has ever generated — even stronger than during the housing heyday of 2007!

With new store openings between then and now, it’s certainly possible to produce that kind of profit. But, at some point in time the number of willing-and-able consumers is going to have to top out (and with Home Depot’s income back to levels seen at housing’s peak, that top-out can’t be too far down the road). Problem is, the stock’s well into record territory, suggesting an expectation that the construction market is going to reach record size within the foreseeable future. That’s a recipe for disappointment.

And if the pundits are right about heading into another recession now, that’s really going to pull the rug out from underneath HD, as the real estate and construction market dries up.

Pfizer

As old and tired as the Lipitor/patent-expiration story is … well, if it still matters, then it still matters.

Despite a decent wave of newly approved drugs, Pfizer (NYSE:PFE[8]) still has been unable to introduce anything that will fully offset the loss of the revenue being produced by its cholesterol-fighting pill Lipitor. And being a franchise worth $10 billion per year, Pfizer desperately needs something to make up for that loss.

In its defense, new drugs like Lyrica and Prevnar have gotten good traction. Lyrica, for pain relief, and Prevnar, a bacterial infection vaccine, saw sales rise about 10% last quarter. Yet, the two only generated about $2 billion in sales between them in Q2.

Point being, for every dollar that comes in Pfizer’s front door thanks to new drugs, two more dollars fly out the back door thanks to expiring patents. It will take a little more than another year for Pfizer to finish falling off its patent cliff. There’s not a lot on the pipeline to look forward to in the meantime.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  2. saying WMT stock was a “buy.”: http://investorplace.com/2012/05/investors-finally-give-walmart-wmt-the-green-light/
  3. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  4. Bill Ackman has all but telegraphed his intent to remove McDonald: http://investorplace.com/2012/08/pg-waiting-on-action-from-ackman-pg-fbhs-cp/
  5. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  6. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  7. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  8. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE

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