It’s important to remember that while the aphorism “a rising tide lifts all boats” may work for the oceans, the markets aren’t like a body of water. While this concept may be broadly true, it is by no means something that you should adopt as an investment mantra.
We’ve been in a bull market for blue-chip stocks that has lasted 60% longer than the average bull market. And it shows no signs of stopping. Some of this has to do with the generous nature of the Federal Reserve over this time frame, rather than a rejuvenated economy. But rise it has.
The mistake is to think that this has been good news for all the blue-chip stocks. Some have run into significant challenges in their specific sectors and some are losing out to new competition that is taking advantage of new revenue channels.
We’ve created a list of seven blue-chip stocks that will hold you back. If you own then, unwind your positions. If you don’t own them yet, don’t buy them now.
Blue-Chip Stocks to Sell: Chipotle (CMG)
Chipotle Mexican Grill, Inc. (NYSE:CMG) was a pioneer in the quality fast-food movement. Its restaurants — nearly 2,200 in the U.S. alone — allow customers to customize their own tacos, burritos and salads from quality ingredients.
The problem is, when you hang your hat on quality and then end up having two separate outbreaks of food poisoning from your products in a year, it’s tough to come back from. You have to rebuild.
And unfortunately, management has been quiet on the issue. While it’s taken big internal measures to overcome it, it has not really done much outreach to its customer base. The thought is that management wants to put this mess behind it and move on.
There are plenty of others moving into the space, however, and customers aren’t as comfortable as they once were and have not been assuaged. CMG also launched a new ShopHouse Asian Kitchen concept last year and has already announced it’s shuttering the operation to focus on Chipotle. Not a good sign.
Blue-Chip Stocks to Sell: Simon Property (SPG)
Simon Property Group Inc (NYSE:SPG) is one of the biggest real estate investment trusts in the market, sporting a $52 billion market cap. It’s 4.1% dividend yield is also attractive. What isn’t so attractive about SPG is the fact that its primary business is shopping malls.
Shopping malls in the U.S. are in significant transition. Major “anchor” stores are closing — Sears Holding Corp (NASDAQ:SHLD), JC Penney Company Inc (NYSE:JCP), Macy’s Inc (NYSE:M), to name a few — and the new trend is smaller malls that aren’t dependent upon big box stores for their success.
Remember, when a mall loses a big retailer, the smaller shops suffer as well. And that hurts the REIT. Add to that the fact that now there are no replacement stores to take up that massive square footage that has been deleted.
Another challenge is, as a Macy’s official observed in the last depressing earnings report, the problem isn’t as much online shopping as it is lower priced retailers that make it tough for retailers with higher price points. And this trend is just beginning.
Blue-Chip Stocks to Sell: Estee Lauder (EL)
Estee Lauder Companies Inc (NYSE:EL) is yet another brand that has been put under pressure by a new generation of buyers that are awash in high-end beauty products and have become more price sensitive than earlier generations.
Paying a premium isn’t as cool as it once was for aspiring middle class and middle-class shoppers. And EL has pulled in a number of popular fragrance brands over the years — Tommy Hilfiger, Michael Kors, MAC, Clinique, Bobbi Brown and Aveda to name a few. The problem is, there is such a proliferation of these products that are now available everywhere, many shoppers look for the best deals, and that hurts EL’s bottom line.
And retailers like Ulta Beauty Inc (NASDAQ: ULTA) have also chipped away at EL’s base with competitive products of their own at lower prices. EL is also dependent on the big box retailers that are now having their own problems of lower same store sales and slower traffic.
The model is in transition and this is no time to get involved.
Blue-Chip Stocks to Sell: Gilead (GILD)
Gilead Sciences, Inc. (NASDAQ:GILD) had a great run with its two hepatitis C drugs, Harvoni and Sovaldi. Over the past five years, the stock is up almost 200%. But in the past year GILD is off 23%. And that isn’t because President Trump wants cheaper medicines.
The biggest challenge for GILD at this point is that a number of competitors have joined in the hep C market. Remember, when GILD was the go-to player, a 12-week course of treatment with Sovaldi cost $84,000.
Granted, it has a 90%-plus cure rate for specific types of hep C, and a liver transplant costs around $600,000, if you can get one. But now, with all the major drug firms rolling out similar and improved versions of a “one-pill-a-day” drug, there’s price competition at the insurance and pharmacy levels.
Making this worse is the fact that, while GILD is sitting on a pile of cash, it hasn’t put the money to use, say, buying a biotech that has a couple drugs in other strategic areas. GILD is at a crossroads.
Blue-Chip Stocks to Sell: Target (TGT)
Target Corporation (NYSE:TGT) is in yet another rebuilding phase. In 2014, after sucking wind for over a year, with no real changes on the horizon, TGT made a change and brought in a new CEO, Brian Cornell.
He went right to work, shuttering Canadian stores, sorting out the online hacking mess and creating a more dynamic pipeline for its clothing lines. He also built out the company’s online retail business. Things looked promising in 2015, and 2016 had its ups and downs, and ended more down than up. This year has been all down — 23% year to date, and 32% in the past 12 months.
Big box retailers are having a tough go of it, as shoppers are more price savvy than they have been in other recoveries. And there’s a good chance that’s because this recovery has taken place more in the markets than it has on Main Street. Disposable income hasn’t been in a bull market for many years.
This fact has revealed itself in this sector in particular. And now TGT is on another rebuilding year, pledging to sink $7 billion to revamp its current stores. It is also planning to build out its store-branded organics to make its grocery services more attractive.
But there’s still more downside risk here than upside opportunity.
Blue-Chip Stocks to Sell: VF Corp (VFC)
VF Corp (NYSE:VFC) is the biggest clothing maker that you’ve never heard of. It sports a $21 billion market cap and is the company behind the iconic brands The North Face, Timberland, Vans, Wrangler and Lee Nautica.
Now those are some brand names you can get your mind around. The problem is, the firm’s distribution channels are its lifeline. And those distribution channels are shifting from the big box department store-style retailers to various other sales venues, like online and discounters like TJX Companies Inc (NYSE:TJX), Marshalls and Ross Stores, Inc. (NASDAQ:ROST).
This squeeze has a direct impact on margins. But it’s not the only squeeze. The competition is also stepped up. As consumers are more price conscious than brand conscious, they are less willing to pay a premium for these brands and then the premium brands have to compete on price with lower-priced brands. None of this helps the bottom line.
These are the key reasons the stock is off almost 20% in the past 12 months. And this trend is just beginning.
Blue-Chip Stocks to Sell: L Brands (LB)
L Brands Inc (NYSE:LB) is remarkably generic name for some pretty high visibility stores: Victoria’s Secret, PINK and Bath & Body Works.
But premium brands are suffering with the proliferation of lower-cost options. Millennials are less concerned with buying $110 bras or $14 bubble bath than earlier generations. This trend doesn’t bode well for keeping a steady business with these consumers.
In late February, the company released earnings that weren’t good, but weren’t terrible. However, LB announced that February sales were expected to be off in the “mid- to high teens” for the company and off 20% for Victoria’s Secret in particular. Remember, February is a short month with Valentine’s Day in it, which should be great for business.
Also remember that LB’s stores are largely in shopping malls that are seeing fewer and fewer customers and losing major anchor stores. Year-to-date, the stock is off 24% and that makes its stunning 4.8% dividend little compensation for LB’s precarious position.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
