7 Big-Name Blue Chips to Sell

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Blue chips have bounced back lately, with the markets rallying over the last week or so to put the major indices back into the black on the year.

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But investors shouldn’t be fooled into thinking that this recent lift means that all big-name stocks are worth holding. The bottom line is that prospects remain challenged for many companies on Wall Street thanks to a slow-growth international environment and currency exchange rates that are working against many major multinationals.

And, of course, there are always stocks that continue to struggle because of poor leadership or products as competitors eat their lunch.

As blue chips with big names, none of these companies are at risk of going bankrupt tomorrow. And some pay decent dividends, so there may be a reason for certain investors to hang tough if they have a good cost basis.

But this list of big-name blue chips is being punished for a host of reasons and will not keep pace with the markets. They should be considered off-limits to new money, as well as “sells” for investors who have better options right now.

Blue Chips to Sell: Sprint Corp (S)

Blue Chips to Sell: Sprint Corp (S)Sprint Corp (NYSE:S) ran up in 2013 on hopes that the telecom company would get some swagger back and join forces with T-Mobile US Inc (NYSE:TMUS) to finally stand toe-to-toe with Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T).

That merger never happened, and for about a year Sprint has been in free fall as a result; shares of S stock are down about 45% in the last 12 months.

It’s not just the failed merger that has fueled this kind of negativity. Sprint has been bleeding cash for years now, struggling to upgrade and maintain its wireless network and keep pace with rivals. The pressure on cash flow is serious, not only preventing dividends but earning a recent credit downgrade from S&P down from BB- to just B+ — putting it even deeper in “junk” territory with a negative outlook to boot.

The cash burn and pressures on the network are starting to show up in disappointing customer satisfaction surveys, too, with Sprint complaint cases outnumbering its competitors according to recent reports.

The icing on the cake: Sprint is currently eying bankrupt electronics retailer RadioShack Corporation (OTCMKTS:RSHCQ) to give it a huge boost in brick-and-mortar sales and service locations in an effort to take share from Verizon and AT&T. But with such cash pressures and problems with satisfaction, how is simply getting in front of more customers the biggest issue ahead for Sprint?

Telecom in general has underperformed the market in recent years, but at least some of the more established players have stability and dividends. Sprint stock has neither — and shouldn’t be on your radar as a result.

Blue Chips to Sell: Alibaba Group Holding Ltd (BABA)

Blue Chips to Sell: Alibaba Group Holding Ltd (BABA)Alibaba Group Holding Ltd (NYSE:BABA) has been on my radar as a stock to sell for some time. And while many may think that the worst is over after shares have fallen about 30% from highs of around $120 in November, shares of BABA stock are still in trouble.

For starters, disappointing earnings from the Chinese Internet giant in January show that there are signs of stress at this seemingly bulletproof tech stock. In fact, BABA stock lost about 10% in a single session as revenue missed by a mile; in the all-important December quarter that included Single’s Day, Alibaba reported 40% revenue growth to $4.22 billion, well short of the $4.45 billion forecast.

While the recent lockup expiration seemed to pass without too much nastiness, with a glut of about 430 million shares (nearly 18% of the company) eligible for trading, this is only the prelude to a larger lockup that expires in September. In a few months, Alibaba will unshackle 1.58 billion ordinary shares — almost four times the amount hitting the market this spring!

And from a valuation perspective, price-to-sales ratios for BABA stock are off the chart even after the rollback. Specifically, Alibaba trades at 18 times sales vs. about 2 for Amazon.com, Inc. (NASDAQ:AMZN) or about 4 for eBay Inc (NASDAQ:EBAY).

To make matters worse, Alibaba isn’t just overvalued in and of itself, but it is engaging in the continued inflation of a new tech bubble by throwing $200 million at hyped-up messaging app Snapchat recently to give it a valuation close to $15 billion — all despite having barely any revenue, losing its COO and fighting through recent lawsuits regarding discrimination. In this kind of environment, it’s clear that many tech stocks have been overly inflated by unrealistic.

But unlike others, Alibaba already has momentum firmly to the downside. That is a recipe for continued pain when tech valuations crash back to earth.

Blue Chips to Sell: Tiffany & Co. (TIF)

Blue Chips to Sell: Tiffany & Co. (TIF)Tiffany & Co. (NYSE:TIF) may sound like exactly the right stock to buy now amid weak gas prices lifting consumer spending and the hopes of a continued recovery in the U.S. labor market.

However, TIF stock stepped off a cliff in January after weak holiday sales driven in part by unfavorable currency exchange rates; TIF stock lost about 20% in 24 hours after that news a few months back.

Even worse is what these results mean for the rest of the year. Tiffany missed Wall Street’s revenue estimate in part because of the strong dollar, and the greenback shows no sign of weakening anytime soon with the continued recovery in America, persistent weakness in Europe and the prospect of rate tightening at the Fed even as other central banks engage in looser monetary policy.

And as Dan Burrows recently pointed out, to top it off, TIF stock execs said in January that they expect the jeweler to show “minimal growth” this year.

As a luxury company that’s highly dependent on global sales in Europe and in China, the currency headwinds would continue take a bite out of the bottom line even in good times. But amid weak revenue growth, the problem is even worse.

As a result, looking forward to Q1 earnings, TIF stock is planning for a 30% decline in sales.

It all adds up to a stock that isn’t worth buying even after its recent drop has provided a discount. Sadly, shares of TIF stock should keep slumping in the months ahead.

Blue Chips to Sell: Mattel, Inc. (MAT)

Blue Chips to Sell: Mattel, Inc. (MAT)Mattel, Inc. (NASDAQ:MAT) is a consumer stock of a different stripe, catering to kids instead of high earners. But just like Tiffany, Mattel hasn’t been much fun for investors to own in 2015.

The toy maker has plummeted 23% since New Year’s, thanks to weak fourth-quarter results at the end of January that missed the mark by a mile — again.

Take a look at this bleak track record from Mattel:

  • Q1 2014: EPS estimate of 9 cents, but an actual loss of 3 cents
  • Q2 2014: EPS estimate of 18 cents, but an actual profit of only 3 cents
  • Q3 2014: EPS estimate of $1.03, but an actual profit of just 98 cents
  • Q4 2014: EPS estimate of 92 cents, but an actual loss of 52 cents

This is a company that cannot get its act together, and cannot be trusted to hit its numbers.

Sure, CEO Bryan Stockton was forced out in disgrace after recent troubles, but that’s just a shuffling of the deck chairs on a sinking ship. Mattel was brutalized in the all-important holiday quarter, and change takes time as new products and brands need to be developed and brought to market.

In short, Mattel is too far behind to succeed in 2015.

Barbie, which represents about 16% of total Mattel sales, doesn’t connect anymore, and the loss of its Disney Princesses license to rival Hasbro, Inc. (NASDAQ:HAS) will only pile on the pain. And while continued cost-cutting and perhaps a Hail Mary acquisition are likely in the year ahead, those are just smokescreens to take away attention from a severely ailing toy company.

Forget your fond childhood memories of Mattel’s products and cut this one loose.

Blue Chips to Sell: Ralph Lauren Corp (RL)

Blue Chips to Sell: Ralph Lauren Corp (RL)Ralph Lauren Corp (NYSE:RL) is one of the worst performers in the S&P 500 this year, with a massive 27% decline since Jan. 1.

The biggest reason was an ugly fiscal third-quarter report in February that showed flat revenue that fell short of expectations, earnings that missed analysts’ estimates and a weak outlook.

Bulls may point to an increase in Ralph Lauren’s dividend and payouts that are sustainable at less than 25% of earnings. But the yield still is an anemic 1.5% even after the bump. That’s not going to give you much comfort with massive declines like what we’ve seen.

As a U.S. company, like Tiffany, Ralph Lauren is suffering from unfavorable currency exchange rates that are making sales even worse. No wonder Deutsche Bank and UBS quickly cut their price targets after the earnings debacle and downgraded this apparel stock.

Even after the crash, Ralph Lauren has a forward price-to-earnings ratio of about 19, which isn’t cheap compared with an earnings multiple of about 17.5 for the S&P 500 at large and forward P/Es of about 14 for competitors Michael Kors Holdings Ltd (NYSE:KORS) and PVH Corp (NYSE:PVH), the latter of which commands brands like Calvin Klein and Tommy Hilfiger.

Apparel stocks can be fickle investments, and there’s a chance that RL stock gets its mojo back thanks to a big shift in tastes or a creative fashion line … but that kind of gamble right now, at these valuations and with this negative momentum, seems like a losing bet.

Blue Chips to Sell: Freeport-McMoRan Inc (FCX)

Blue Chips to Sell: Freeport-McMoRan Inc (FCX)Copper king Freeport-McMoRan Inc (NYSE:FCX) is a mining company that digs up mostly copper but also gold and silver. Just one of these businesses would be bad enough, but the strong U.S. dollar has worked to keep prices of both metals painfully low across the board.

In addition, the demand for copper in construction and electronics has slowed, owing to weaker economies in China and Europe. That means pricing for the base metal is currently down about 40% from its peak four years ago and bouncing around the lowest levels since mid-2009.

FCX posted a steep loss in the fourth quarter, even amid aggressive cutbacks on capital spending. But while that may stop the bleeding, the reduction of about $2 billion in areas like exploration and equipment may hamstring Freeport-McMoRan’s stock after the initial pop of cost savings.

Because it’s a leader in the industry, Freeport-McMoRan isn’t going anywhere, but investors shouldn’t be duped into thinking the payout is completely safe, even with the enticing 6.5% dividend yield. Profits should remain challenged in fiscal 2015, and a consensus target of 87 cents in EPS doesn’t even cover the $1.25 in dividends that Freeport-McMoRan is scheduled to pay out annually.

As the dollar remains strong and industrial demand remains weak, there are better places to park your cash — namely, stocks with more sustainable dividends.

Blue Chips to Sell: Diamond Offshore Drilling Inc (DO)

Blue Chips to Sell: Diamond Offshore Drilling Inc (DO)Diamond Offshore Drilling Inc (NYSE:DO) is one of those oil-service stocks that have been gutted by the crash in crude oil. But the pain is particularly bad for Diamond, given its deepwater focus.

Deepwater drilling is expensive, making it unprofitable during times of low oil prices. At the same time, Diamond’s mobile rigs and floating units require costly maintenance to keep them seaworthy even if they aren’t in peak use.

Diamond has managed to keep enough work that it remains profitable, but revenue has declined year-over-year in five of the past six quarters as it continues to cut operations to lower costs. And that trend will only accelerate. Looking forward, the consensus estimate is for only 69 cents in earnings per share for fiscal 2016 — down from an estimate of 76 cents per share just a week ago — that would represent just a third of this year’s expected earnings.

As a result of this slowdown, in February the previous dividend schedule of roughly 87.5 cents per quarter including special dividends was slashed to 12.5 cents. That’s never a good sign.

And before you bottom-fish, make sure you’re using this new payout to calculate yield, which stands at a paltry 1.8%, less than 10-year Treasuries.

Given the continued pressure on oil prices from both massive global supplies and weaker demand from Europe and China, it seems highly unlikely that Diamond will dig out of this rut 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 editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/7-blue-chips-to-sell-s-baba-tif-do-mat-rl-fcx/.

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