The market is at an inflection point, where the slow-news environment of the summer is about to meet the high-stakes period in the fall.
Money managers are going to begin their annual race to year-end. Congress is taking up some serious business in the coming months, including yet another contentious debt ceiling fight with a Sept. 30 deadline.
And don’t forget we have the threat of Federal Reserve “tapering” looming large over the stock market just to make things interesting.
So in this uncertain environment, it behooves investors to tread carefully — both in fast-moving momentum plays, as well as sleepy stocks that don’t move much but could significantly underperform based on specific challenges in the months ahead.
If you’re looking to get defensive, you have the right idea. But if you’re in one of these five big-name blue chips, you should bail out ASAP.
McDonald’s (MCD) is the poster child of globalization, with big growth into overseas markets and a dominant brand as well as a dominant reach. Consider that Yum! Brands (YUM), Wendy’s (WEN) and Bugrer King (BKW) combined are still just worth half the market capitalization of McDonald’s!
But there’s more to investing than just size. And after a recent miss on both the top and bottom lines, it’s increasingly clear that MCD has headwinds to growth as it banks big on China consumers (which, by the way, haven’t materialized as hoped) and struggles amid weak consumer spending and a focus on healthier diets in the U.S.
Nobody is saying MCD will go bankrupt anytime soon, and there is assuredly a reason to buy-and-hold this investment for the long-haul based on the big dividend increases across the past decade.
But for the next year or so, it seems that underperformance is going to be the unfortunate reality at McDonald’s … so investors might be better served putting their money elsewhere.
Caterpillar (CAT) is a dominant industrial stock with big name recognition and a nice 2.9% dividend yield. And very recently it won the title of “best Dow stock of the year,” tacking on an impressive gain of 56% in 2010 vs. about 11% gains for the broader industrial average.
But those were happier times, and CAT stock is right back where it was about three years ago and is off about 25% from its 2011 peak — including a roughly 4% decline year-to-date in 2013 vs a significant rally for the rest of the stock market.
Recent softness has been thanks to three straight earnings misses in a row. In January it was a big writedown thanks to fraud at a Chinese company it acquired, in April it was an earnings miss and disappointing guidance and then just a few weeks ago in July it was an ugly 43% slump in profits.
But it’s also the bigger end to a commodities boom we saw a few years ago. Global mining growth that was taking place in spite of the financial crisis has now faded, and the impressive results off the bear-market lows have been met with nothing but disappointment in recent years.
And thanks to slowing commodity demand in China, that mining outlook isn’t going to change anytime soon.
Microsoft (MSFT) seems like the most bulletproof tech blue chip out there, with its dominant Windows operating system and almost $88 billion in cash and investments.
However, the post-PC age is weighing on growth as Windows loses its edge — not to a competitor in desktops and laptops, but to mobile devices like smartphones and tablets.
Microsoft is aware of this and rushing to regroup, but it continues to lag painfully behind in mobile. Take, for instance, the fact that MSFT just sold off sharply after earnings thanks to a $900 million charge related to its Surface tablet.
Yes, the tech giant has slightly outperformed the market thus far in 2013. And yes, the price-to-earnings ratio is still a reasonable 10.5 based on fiscal 2015 forecasts.
But the risk of disruption and falling behind is severe. Microsoft is squeezing as much as it can from Windows and its Office software, but mobile trends and competition are clearly working against this stock.
Despite the 2.9% dividend, Microsoft is not as stable as you think.
Coca-Cola (KO) is an iconic American brand that is a household name both at home and abroad. Couple that with the 2.8% dividend yield and a massive portion of shares held by Warren Buffett and Berkshire Hathaway (BRK.B), and it seems natural to call Coke the ultimate low-risk income play.
But Coca-Cola stock has underperformed in 2013 significantly, and weak earnings lately hint at trouble. Coke earnings details showed North American sales volume slipped for the first time in 13 quarters as soda consumption continues to dry up amid a focus on healthier eating in the U.S. and changing consumer tastes.
Coke made excuses about wet weather sapping sales in its latest earnings, but there are bigger issues at work here.
For instance, a strong dollar could shave almost 5% off operating profit this year as exchange rates make foreign sales less profitable.
Yes, the dividend at Coke has been paid since 1893. But the fizzling soft drink sales based on health trends and the headwinds caused by a strong dollar outweigh any income potential in the near-term.
Oracle (ORCL) bigwig Larry Ellison has been making the rounds bashing Apple (AAPL), but perhaps the CEO should look at his own house before casting stones across Silicon Valley.
Oracle is flat year-to-date vs. a soaring market because of sluggish sales and a tough environment for enterprise software. Revenue was flat for the second straight quarter, and this time Larry Ellison & Co. couldn’t blame the sales force like they did after missing earnings in March.
And according to Capital IQ data, Oracle hasn’t grown its revenue by more than about 3% year-over-year in a single quarter since its first-quarter 2012 numbers hit the market about two years ago.
Oracle insists it is ramping up sales, giving cloud players a run for their money and moving big into networking on the heels of its $1.7 billion acquisition of Acme Packet. But thus far, the efforts haven’t borne much fruit and competitors are just as hungry for growth.
With the broader headwinds facing the IT sector and the continued disappointment on the top line, investors might not want to be too patient with Oracle’s plans — especially considering a measly 1.5% dividend.
Oracle sure isn’t going bankrupt with an entrenched business and $32 billion in cash, so bottom fishing is tempting in hopes of a turnaround. But nothing in the numbers indicates that turnaround will happen anytime soon.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.