U.S. equities pushed to new highs on Wednesday — taking the Dow Jones Industrial Average past the 20,000 level for the first time — thanks to solid Q4 earnings reports and a return of excitement over the economic policies of President Donald Trump.
The move ended a two-month, ultra-tight consolidation range. In fact, December was the quietest, tightest trading range for the Dow since 1900.
While it’s tempting to give in to the excitement and enthusiasm, there is a risk this is a head-fake blow-off move ahead of a long-overdue pullback.
Why the skepticism? Market breadth has been narrowing, sentiment is off-the-charts bullish, “smart money” traders in the futures and options markets have been turning against the market for weeks, and the Federal Reserve is likely to lean against this rally by raising the prospect of multiple interest rate hikes this year.
The catalyst for the pullback will likely be the next Federal Reserve policy statement on Feb. 1, which will surely bolster the case for another three quarter-point hikes in 2017. For years, the stock market has been bolstered by the apparently unending flow of cheap-money stimulus from the Fed; the removal of this support will not be well-tolerated.
Investors should be cautious and prepared. Here are five stocks to sell — or at least take partial profits or hedge against — in February.
Blue-Chip Stocks to Sell in February: U.S. Steel (X)
Despite the strength seen elsewhere in the materials sector, United States Steel Corporation (NYSE:X) shares have been rolling over from their early December high, falling below their 50-day moving average.
This also comes in the wake of strong earnings from competitor AK Steel Holding Corporation (NYSE:AKS), hopes of boosted infrastructure spending under Trump, and the potential for anti-dumping tariffs against foreign metal.
Possible concerns include evidence of emerging weakness in the auto sector and ongoing industry overcapacity problems. Either way, U.S. Steel is cracking.
Watch for the company’s next earnings report, which is due out Tuesday, Jan. 31. Analysts are looking for a loss of 2 cents per share on revenues of $2.7 billion.
Blue-Chip Stocks to Sell in February: Rite Aid (RAD)
Rite Aid Corporation (NYSE:RAD) shares dropped hard over the past week — down nearly 20% — in the wake of possible antitrust concerns that could stall its proposed tie-up with Walgreens Boots Alliance Inc (NASDAQ:WBA).
A suggested remedy — the sale of some RAD stores to a competitor — hasn’t fully won over regulators, according to reports.
The latest is that WBA’s board is looking to decide whether to extend the January 27 merger deadline with Rite Aid. While that sounds promising at a glance, to many, that suggests the deal could fall apart despite the late stage.
Technically, Rite Aid could receive a breakup fee of $325 million to $650 million, but that’d be little salve for shareholders who held on expecting to cash out much higher thanks to the merger.
Should Rite Aid still be a standalone company on April 13, analysts will be looking for earnings of 4 cents per share on revenues of $8.3 billion out of its next report.
Blue-Chip Stocks to Sell in February: Verizon (VZ)
Verizon Communications Inc. (NYSE:VZ) shares have collapsed below their 50-day and 200-day moving averages, down more than 10% from its early January high, after failing to challenge its July high near $55.
The drop was the result of weaker-than-expected Q4 earnings of 86 cents per share (3 cents below estimates) on a 5.6% drop in revenue. Analysts at Mizuho Securities noted a continuing deterioration of top-line fundamentals.
Meanwhile, the acquisition of Yahoo! Inc.’s (NASDAQ:YHOO) core assets became even murkier. The SEC is now investigating why the tech company didn’t disclose a hack — one of two announced in 2016 — that occurred in 2014 and affected some 500 million users.
RBC Capital estimates the YHOO deal will close sometime in the second quarter, but there’s a long time between then and now, and potentially more information in the wings.
An important note here is that Verizon is a buy-and-hold stock yielding 4.6%. So an outright sell might only make sense for investors who were already looking to exit their position. Instead, those who want to wait out weakness in VZ could consider buying puts or other options strategies instead.
Blue-Chip Stocks to Sell in February: General Electric (GE)
General Electric Company (NYSE:GE) shares are struggling to stay above their 200-day moving average after nearly completely reversing its post-election rally. This after failing to challenge its summertime highs from July.
The catalyst for the pullback was a disappointing reaction to Q4 results as revenues came up lighter than expected down 2.4% from the year before. Earnings came in at 46 cents per share, in-line with estimates.
Oil and gas continued to be a headwind for General Electric, with revenues off 22% year-over-year. And until the unit is merged with Baker Hughes Incorporated (NYSE:BHI), it will continue to be a drag.
The next scheduled earnings report isn’t until April 21, and analysts are looking for earnings of 29 cents per share on revenues of $26.9 billion.
For now, watch for a move back down to the November low — a decline of about 7% from here. As a note, Edge Pro subscribers enjoyed a 200% gain in a portion of their GE Feb $31 puts sold earlier this week.
Blue-Chip Stocks to Sell in February: Southwest Airlines (LUV)
Southwest Airlines Co (NYSE:LUV) shares have tested below their 50-day moving average on Wednesday for the first time since October after suffering a downgrade from analysts at JPMorgan.
A pall has been cast over the industry by results from United Continental Holdings Inc (NYSE:UAL) last week showing ongoing profitability pressure as passenger revenue per available seat mile dropped 1.6%. Delta Air Lines, Inc. (NYSE:DAL) also cited declining margins.
That said, much of what investors can do about Southwest hinge on earnings, which come out Thursday, Jan. 26, before the bell. Analysts are looking for profits of 69 cents per share on revenues of just over $5 billion.
Weak results here will send LUV packing.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
