Wannabe Warren Buffetts always try to find value where others don’t see it, whether it’s hefty blue chips or growthy small caps.
More often than not, though, these investors find themselves owning stocks that are cheap for a reason, as opposed to stocks that are merely undervalued. (The difference being that the latter won’t be cheap forever, while the former will siphon the money out of your portfolio faster than a vacuum cleaner.)
Below are my picks of beaten-down Blue Chips that have plenty of admirers among the web stock commentators who prognosticate about these things. By the way, I include myself amongst this august and occasionally wrong group. The blue chips that I have listed below may look pretty to investors, but a closer look shows that they are in Wall Street’s penalty box for a good reason.
Dead-Money Blue Chips: McDonald’s (MCD)
When people try to say something nice about someone without many other redeeming qualities, they often say that person has a “great personality.” The equivalent thing that investors say about formerly high-flying stocks is that they’ve “got a great dividend.” Such is the predicament that McDonald’s (MCD) finds itself in.
To be clear, the 3.2% yield of MCD stock is above the 1.96% average of the S&P 500, but there are better ways to chase yield. Other stocks like Hasbro (HAS), General Motors (GM) and General Mills (GSI) have yields that are nearly as good or better than McDonald’s. All have the potential for better upside than the “home of the golden arches.”
MCD shares are cheap, trading a forward price-to-earnings multiple under 18. But they are cheap for a reason. Everyone from Wendy’s (WEN) to Yum Brands’ (YUM) Taco Bell is eating McDonald’s lunch. MCD has alienated customers and has even angered its own franchisees.
The House of Ronald expects to see some “modest” improvement in same-store sales in April, but I’ll believe it when I see it, given the five straight declines in this key retail metric. Chief Executive Don Thompson has struggled to gain traction as a raft of new products such as Mighty Wings to Angus Third Pounders flopped. MCD shares will continue to give investors indigestion for a while.
Dead-Money Blue Chips: Coca-Cola (KO)
Let’s set aside the question of whether Warren Buffett was right to keep his mouth shut about Coca-Cola’s (KO) excessive compensation plan. Instead, let’s discuss the pickle that the world’s largest soda company finds itself.
America’s century-long love affair with carbonated beverages has cooled considerably. Per-capita soda consumption is a multi-year low. Sales of soda are tumbling. Even more troubling is the decline in diet soda, which was considered to be the industry’s saving grace. I don’t see how teaming with Green Mountain Coffee (GMCR) is going to change this fact.
Baring the discovery of a low-calorie sweetener that cures baldness, Coca-Cola is going to face difficulties selling its signature product because there is nothing positive that can be said about it. To say the fizz has drained out of KO stock may be an understatement.
Dead-Money Blue Chips: IBM (IBM)
Long before there was an Apple (AAPL), Google (GOOG) or Facebook (FB), IBM (IBM) was the company that Americans associated with technology. While its history is certainly noteworthy, Wall Street only wants to know, “What have you done for me lately?” And in the case of Big Blue’s stock, the answer has been depressingly little.
The company is a hodgepodge of software, hardware and services. Were it being built today, there is no way any company would attempt to compete in such a broad array of markets. The other issue, as was evident in the last quarter, is that the strong businesses like software aren’t strong enough to overcome the weaknesses of struggling operations such as hardware.
To make maters worse, IBM can no longer count on its Services business to make up the difference. Last quarter, it reported double-digit declines in pre-tax profit and and a 1% decline in revenue. Companies still need advice but just aren’t willing to pay up for it.
CEO Ginny Rometty is betting that cloud computing, security and big data will turn the company around. Unfortunately, that’s the same plan as every other tech company. Investors may wish they could hit control-alt-delete on IBM shares, but they aren’t so lucky.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jdberr.