Blue chips seem to have gotten their mojo back after a rough January, with the S&P 500 once again pushing its way up against new all-time highs.
But investors who think this trend means you can buy any old large-cap stock should think again. There is very much a difference between the best blue chips to buy now, and struggling companies that might be big names with consumers but remain on the outs with Wall Street investors.
Adding fuel to the fire is the challenging earnings environment characterized by low global growth and a strong U.S. dollar holding back the corporate profits of big multinationals based in America.
There is plenty of money to be made in this market with the right bets, but investors need to keep in mind that half the battle is avoiding dead-money stocks that do nothing for you — even if they are big names that aren’t at risk of bankruptcy or steep declines.
If you want to avoid underperformance in 2015, here are seven busted blue chips to trim from your portfolio now.
Blue Chips to Sell Now: Wal-Mart Stores, Inc. (WMT)
Market Cap: $280 billion
YTD Performance: -1% vs. +1% for the S&P 500
Wal-Mart Stores Inc. (NYSE:WMT) posted third-quarter earnings that showed some progress for the retail giant, but Q4 earnings showed a reversion to old troubles as the company offered weak forward guidance. Also, while Q4 profit was up and topped expectations, the company missed yet again on its top-line number as foot traffic remains weak.
Adding fuel to the fire is Walmart’s announcement of a sweeping wage overhaul, boosting the salaries of some 500,000 workers in an aim to get them to $10 per hour by February 2016. So while the company seems to be doing more with less now in regards to profits, margins undoubtedly will be pinched going forward.
Throw in the perpetual problem of branding as a company that caters to low-income Americans, and which suffers in a strengthening economy as its customers seek out more upscale shopping options, and WMT stock is definitely in a bind for 2015.
The dividend is OK at 2.3%, but not enough to justify owning this stagnant retailer amid what is sure to be continued trouble with both revenues and profits going forward.
Blue Chips to Sell Now: Microsoft Corporation (MSFT)
Market Cap: $360 billion
Sector: Information Technology
YTD Performance: -6%
Microsoft Corporation (NASDAQ:MSFT) shrugged off its reputation as a sleepy stock in 2013 and 2014, with shares surging 85% across those two years. But investors shouldn’t be lulled into a false sense of security by the recent run, because shares of MSFT stock are running out of gas.
Microsoft stock is down considerably in 2015 even as the market has trended higher, led lower in part by an ugly fiscal Q2 earnings report that showed a roughly 9% decline in profits.
Another big issue was the unveiling of Windows 10 — the latest stab by the software giant at a “next-generation” operating system — that didn’t seem to wow investors, and could be poorly received if it requires a regular subscription payment.
And let’s not forget that while Microsoft Surface sales have firmed up, tablets are not quite the fertile ground that smartphones are when it comes to the upgrade cycle; rival Apple Inc. (NASDAQ:AAPL) has proven that many consumers prefer a larger-sized phone as their primary device and don’t feel a need to purchase the latest tablets as frequently.
It all adds up to what appears to be a continuing narrative of struggles to bring Windows into a mobile age, and struggles with mobile hardware. That doesn’t bode well for MSFT stock in 2015 — especially after the run-up in recent years indicates a lot of optimism is priced in.
Blue Chips to Sell Now: Procter & Gamble Co (PG)
Market Cap: $235 billion
Sector: Consumer Staples
YTD Performance: -5%
Procter & Gamble Co (NYSE:PG) is the quintessential bedrock stock for many investors, with its strong consumer brands including Gillette shaving products, Pampers diapers and Tide laundry detergent.
However, investors shouldn’t confuse stability and growth. PG stock has actually underperformed not just in 2015, but also over the last several years.
Consider that since the beginning of 2010, PG is up about 40% vs. 90% for the S&P 500 in the same period. Even including dividends, PG stock is underperforming by more than 30 percentage points.
That’s thanks in large part to a continued struggle to move the top line in the right direction; Procter & Gamble is riding five consecutive quarters of year-over-year revenue declines.
Worse, the trend will persist in 2015 thanks to a strong dollar weighing down the overseas profits of this multinational corporation. In fact, PG just reported that fiscal 2015 profits could be reduced by as much as 5% thanks to unfavorable currency exchange rates.
There are undoubtedly long-term, dividend-focused investors out there who think PG stock can do no wrong and will continue to hold this company forever. But while stability is fine for investors who are sitting on a big portfolio already, those of us who are still interested in growing our money should look elsewhere for better opportunities.
Blue Chips to Sell Now: Google Inc (GOOG, GOOGL)
Market Cap: $370 billion
Sector: Information Technology
YTD Performance: +3%
Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is a tech darling that can do no wrong in the eyes of many investors. However, despite its robust ads business, there are serious concerns that GOOG momentum is waning and that the top line is starting to flat line.
Consider that in January, Google missed its revenue targets for the fifth consecutive quarter along with another decline in the dreaded “cost per click” metric for advertising.
At the same time, there has been continued pressure from increased operating costs along with big investments in R&D and other special projects that have not driven any real value to shareholders.
There’s also increasingly tough competition from Facebook Inc (NASDAQ:FB) in the advertising department, as well as the drag on profits from many unprofitable pet projects like self-driving cars, Google Fiber Internet access and those goofy Google Glasses.
There assuredly are big believers in Google who think the company will come up with the next big thing. There also are those who think that while certain arms like the Android smartphone operating system are not profitable now, they will open doors to future revenue streams over time.
Me? I’m not that patient with a stock that has declined 10% in the last year on fading sentiment, and one that doesn’t pay a penny in dividends despite its massive cash hoard and stable operating cash flow.
Blue Chips to Sell Now: Chevron Corporation (CVX)
Market Cap: $210 billion
Sector: Integrated Energy
YTD Performance: -2%
Chevron Corporation (NYSE:CVX), like many Big Oil stocks, has been having a rough go of it in the last few months. But a closer look at Chevron shows a company that has been facing headwinds for some time, and investors who have been left behind as a result.
Consider that in February 2011, CVX stock was trading at around $100 a share. Four years later, it’s around $110.
No wonder CVX was downgraded by a bunch of analysts recently, including Wells Fargo, which put a disappointing $108-$116 price range target on shares — basically meaning it expects the stock to continue going nowhere.
It’s also important to remember that the short-term pain of low crude oil prices may become longer-term pain for a company like Chevron as it seriously curtains investment in future production. Just do the math — if Chevron cuts its production by 20%, then it is relying on oil prices to rise enough to offset that shortfall in the future and keep its revenue levels constant or moving higher.
Clearly a company like Chevron is not at risk of bankruptcy, with almost $15 billion in cash on the books and another $27 billion in long-term investments. But as with Procter & Gamble, don’t confuse stability and a decent dividend with the promise of share appreciation — or outperformance in the long-term.
Blue Chips to Sell Now: McDonald’s Corporation (MCD)
Market Cap: $210 billion
YTD Performance: +1%
McDonald’s Corporation (NYSE:MCD) has recently enjoyed bit of a pop on news that CEO Don Thompson would be stepping down. But while Thompson has presided over a lackluster two years or so at McDonald’s, the chief exec certainly was not the only problem MCD shareholders have had to contend with.
Consider that amid the feel-good buzz around a new CEO, McDonald’s said global same-store sales fell 1.8% in January to continue the bigger trend of declining same-store sales plaguing McDonald’s since about 2012.
This isn’t just thanks to poor leadership; MCD stock ranks near the bottom in customer satisfaction for the industry, and surveys continue to show it losing out both among millennials and baby boomers alike. Consider a Brand Keys survey from late 2014 showing that restaurants like Panera Bread Co (NASDAQ:PNRA) and Chipotle Mexican Grill, Inc. (NYSE:CMG) top the list of millennial favorites, as well as reporting a 18% drop in baby boomer visits to traditional “fast food” joints like McDonald’s and Yum! Brands, Inc. (NYSE:YUM) franchise Taco Bell.
Rebranding a fast-food restaurant’s menu is incredibly difficult — and that would be hard enough to pull off even in good times, let alone amid global growth headwinds and currency exchange rates abroad holding back profitability.
The last glimmer of hope for MCD stock comes from its income potential, but it’s unlikely that yield will rise significantly going forward. Consider that McDonald’s is currently paying $3.40 a year in dividends but projected to earn only $5.04 per share for 2015 — a 67% payout ratio.
The only hope for dividend growth is profit growth. And unless something remarkable happens, profits are unlikely to increase dramatically in the next few years.
Blue Chips to Sell Now: United Parcel Service, Inc. (UPS)
Market Cap: $93 billion
Sector: Shipping & Logistics
YTD Performance: -8%
United Parcel Service, Inc. (NYSE:UPS) posted fourth-quarter earnings that were in line with estimates, but don’t let that fool you; UPS slashed its outlook in the run-up to earnings, admitting that it had to spend a lot more than expected to prevent problems with this year’s holiday shipments.
That’s an ugly sign, putting UPS in the unenviable position of seemingly choosing between a poor experience for its customers (as we saw in 2013) and high expenses that hold back profits (as we saw last year).
As with other multinationals on this list, the stronger U.S. dollar also weighed on UPS and continue to hold back earnings in 2015 to boot.
In a market that is increasingly focused on growth concerns, banking on a company that badly missed profit forecasts and is projecting meager 3% revenue growth in 2015 seems like an awfully bad idea.
And given that UPS stock has a forward price-to-earnings ratio of almost 18 at current levels, that doesn’t leave a lot of room for error if the company misses the mark again.
UPS stock appears fully valued and will not provide much upside this year unless there is a big catalyst to change the current course of things — something that seems highly unlikely for this shipping giant.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.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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