Let me clue you in on a secret, especially those of you who are retirement or income investors.
Just because a company has a well-known name doesn’t mean you should park your money in the stock. Just because it’s one of many large-cap stocks that analysts talk about as being “safe” doesn’t mean it is.
There’s a tendency for large-cap stocks to rest on their laurels and become slow and stodgy. You don’t want to hold these stocks, because they are not only being left behind in the 21st century, but they also probably sport price-to-earnings ratios that are vastly in excess of fair value. Moreover, they are most likely growing at a very slow rate, but management engages in some financial engineering via buybacks and big expense cuts to boost the EPS growth.
Don’t be fooled.
Today, we’re going to look at three such large-cap stocks you should sell now. There are better places for your money.
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Large-Cap Stocks to Sell: McDonald’s Corporation (MCD)
I hate to say it, but as for large-cap stocks, my beloved McDonald’s Corporation (NYSE:MCD) is now facing headwinds unlike any it has experienced before.
Until recently, Ronald and his pals really only had to contend with other burger joints. Even those other chains didn’t come close to his market share.
Now, however, McDonaldland is facing a two-front war. Mayor McCheese and Grimace are doing battle with a resurgent Burger King Worldwide Inc (NYSE:BKW), which just merged with Tim Horton’s, not to mention other surging contenders like Five Guys and newly public Shake Shack Inc (NYSE:SHAK).
The Fry Guys and Big Mac are taking on everyone else, too, and that’s a lot of different food types. See, the notion of fast healthy food has become a reality. While MCD stock has gone to a healthier menu, it’s still struggling against the likes of Chipotle Mexican Grill, Inc. (NYSE:CMG), and hordes of different styles of reasonably priced foods.
MCD stock replaced its CEO amidst poor execution, but now it must face a daunting reality. The company can compete with anyone on price, but now it must also compete on quality and perception of healthy eating. McDonald’s is going to need a true visionary to move it forward.
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Large-Cap Stocks to Sell: DuPont (DD)
I don’t intend to be nasty, because I thought the film Foxcatcher was really well-made and entertaining. However, E I Du Pont De Nemours And Co (NYSE:DD), or simply DuPont, appears to be as ill as the film’s lead, the infamous John DuPont.
DD stock used to be synonymous with some incredible innovations, particularly in chemicals, like Kevlar, Mylar and Orlon, as well as the famous Teflon. Its business also stretched into oil and gas. Except now it really isn’t sure what it is.
DD stock sold its energy business to ConocoPhillips (NYSE:COP). Then it divested its fibers and textiles division. Then it bailed on coatings and paints. Finally, the planned chemicals business is being spun off.
What exactly is left?
DuPont has moved strongly into agriculture, now accounting for about a third of revenues, as well as materials, nutrition and health, and industrial bioscience. It is certainly making progress in all of these areas.
However, the stock trades at PEG ratio of well over 2, and earnings per share have been goosed by a lot of share buybacks.
I say just watch Foxcatcher instead and reinvest your funds elsewhere.
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Large-Cap Stocks to Sell: Cisco Systems, Inc. (CSCO)
This next one I’ll admit that I’m on the fence about. I fondly remember the days when Cisco Systems, Inc. (NASDAQ:CSCO) was one of the “Four Horsemen of the Nasdaq,” a group of four large-cap stocks that were growing like crazy.
Now, things are a bit shakier. Cisco has experienced a tumultuous time — its disparate divisions weren’t creating hardware that worked well together, expensive acquisitions designed to upgrade technology crapped out, and the market ripped ahead of CSCO.
Nowadays, the buzzwords are “virtualization of hardware,” which is essentially creating software to make hardware work better. Cisco used to be competing against other hardware companies, but now it has to deal with software companies that specialize in the Internet.
So CSCO stock has been trying to transition to be a software play, targeting cloud computing, virtual Internet switches, and internet links between different devices and systems, whether it be manufacturing tools or healthcare devices, or auto or home entertainment, right on over to heating and cooling systems.
All that said, things have gone well for Cisco of late. This week’s earnings report looks especially good, and its turnaround at least appears to be catching hold.
Of these three stocks, this is the least certain sell. This is more of a coin toss that really depends on your personal long-term goals. I like other tech stocks to outperform CSCO stock, so I would take any gains I’ve made in CSCO of late and try my luck elsewhere.
It’s OK to keep the faith. Just don’t expect Cisco to go above $35 any time soon.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he did not hold a position in any of the aforementioned securities. He can be reached at TheLibertyPortfolio@gmail.com.
