The S&P 500 is up an amazing 22% year-to-date, with no signs of slowing down.
However, for cautious investors that doesn’t mean it’s time to just throw money around the stock market willy-nilly. You can be in the wrong stocks right now even though you’ve made some money in 2013 — and it’s important to keep relative performance in mind.
For instance, if you have big-name blue-chips in your portfolio that have delivered a small gain so far this year, you may be inclined to consider them “good buys.” However, a stock that is up 10% has performed less than half as well as the average stock on Wall Street.
And remember, that’s just the average, with others significantly outperforming even the 22% gains by the S&P.
It’s true that being greedy can do a lot of damage to your portfolio as you chase risky investments. But sitting on your hands and accepting a fraction of the gains that the broader market is racking up is not a good way to plan for retirement — because not only are you missing out on profits, but you risk seeing your stocks tumble even faster than the better investments that are out there when the market hits a rough patch.
Protect yourself against a downturn by getting into stronger stocks, and grab the profits you deserve by rotating out of these five underperformers and trading up.
Year-to-date, Cisco (CSCO) is up about 17% to only slightly underperform the market, so you may be inclined to think that this enterprise tech stock is a decent buy — particularly with its roughly 3% dividend yield.
However, enterprise tech in general hasn’t had a great year in 2013 amid soft business spending, with IBM (IBM) and Oracle (ORCL) both actually in the red year-to-date. And after IBM just dipped on ugly earnings including very soft performance in Asia, it doesn’t bode well for CSCO.
Cisco doesn’t report earnings until November, but in August the company missed the mark slightly on guidance with projected revenue growth of a mere 3%-5%. And profits are still being juiced by efficiencies more than anything else, with another round of layoffs trimming 4,000 workers from Cisco — or about 5% of its workforce.
Cisco is admittedly in much better shape than it was in 2011 after some recent restructuring, but it’s important to know that a 3% dividend and decent profits propped up by layoffs aren’t reason enough to stick with CSCO when there are other investments out there. The stock has rolled back quickly from its 52-week high in August, giving up 14% in just two months, and investors should expect continued trouble ahead as enterprise tech remains soft in this challenging economic environment.
Though mostly in line with expectations, McDonald’s (MCD) just delivered disappointing third-quarter earnings that showed stagnant revenue yet again. A meager 2.4% increase in the top line this quarter followed a disappointing 0.9% increase last quarter.
You simply can’t keep growing as a business without sales growth moving higher. MCD has managed to keep profits humming along, but with earnings projected to grow in the low single digits in the next two quarters, it’s going to be hard for investors to find much hope in this fast food giant.
Sure, MCD pays a nice 3.4% dividend, and just increased its payout yet again. But the mere 5% increase in payouts was a bit of a downer for investors expecting higher dividend growth — and perhaps a sign that the company isn’t incredibly confident about future profits and wants to stay conservative.
You could do worse than an 8% gain since January with a nice dividend … but you could have done much better, too. Now that MCD has recovered a bit from its post-earnings decline, investors should sell and move on to a better option.
Exelon (EXC) is one of the largest utility stocks out there, with a $24.4 billion market cap and a dividend of 4.3%. However, like most utility stocks EXC has grossly underperformed in 2013 with a 4% decline vs. a raging bull market that has lifted most other stocks by over double digits.
Exelon is partially a victim of sentiment as investors have gone “risk on” in favor of more growthy investments this year, but it’s also a victim of a too-high valuation. Even now it trades for a forward P/E of almost 13 after missing out on the rally as earnings have edged higher. That’s at best fairly valued, so don’t expect EXC stock to snap back anytime soon.
Thanks to these valuation and sentiment issues, EXC stock was recently downgraded to “underweight” from “overweight” at Morgan Keegan, with a $21 price target — down 26% from here — so if you think that nice dividend is reason alone to hold this stock, consider you could be sitting on a loss even after baking in your monthly distributions over the next year or so.
Utility stocks play a role in low-risk portfolios, yes, but this one doesn’t. Trade out of Exelon because there are a host of other income investments out there that will be a better place to park your cash.
What’s there to say about JCPenney (JCP) that’s good?
The stock is in a tailspin, down 65% year-to-date and about 75% from its late-2012 highs.
Though already a pariah, JCP further diluted its value with investors with an unexpected secondary offering in September.
Sales at JCP have declined 25% over last year, and are set to fall another 7% this year.
And if you need final proof that there is no light at the end of the tunnel, JCP bankruptcy rumors abound, with hints that the embattled retail stock is looking for legal advisers to shepherd it into Chapter 11.
It’s tempting to bottom-fish in stocks like that, particularly if you have some fond memories of JCPenney from decades past … but this is not a stock with a future. Even if the retail stores survive in some form, betting on a recovery here is a very risky game.
If you’re sitting on a big loss in JCP, it’s time to cut loose and move into a safer investment. And if you’re thinking of bottom-fishing to ride a rebound, take a deep breath and look somewhere else.
Walmart (WMT) is the world’s biggest retailer, and certainly has scale and a degree of stability from that reach. But stability is not growth — and Walmart has been struggling to move its sales in the right direction for some time.
In its May earnings report, Walmart U.S. saw same-store sales slip for the first time in almost two years — an uncomfortable reminder of the bleak run from 2009 to 2011 that featured an ugly streak of nine consecutive quarters of same-store sales declines.
WMT repeated that performance with an earnings miss in July and continued declines in same-store sales — and a lowered outlook to boot.
There’s a very good chance that WMT could see similar sales declines again in Q3 when it releases earnings in November, too. Consumer spending hasn’t exactly been great and the recent history shows Walmart is under pressure.
The stock certainly isn’t bankrupting investors, with 11% returns year-to-date and a nice 2.5% dividend. But there are stronger alternatives out there right now, so consider dumping Walmart before earnings.
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.