This slow-motion recovery is taking its toll on even the best blue-chip stocks.
Some of the market’s blue chips are struggling — getting hit by energy prices and a slower-than-expected global recovery. Others are trying ways to stay relevant in maturing markets.
And still others are in a sector that historically gets hammered when rates start to rise.
Now that doesn’t spell doom for these companies – and their stocks – necessarily. But it’s clear that there are better places for your money in the short to intermediate term. Long term, many of these companies are cheap right now. The problem is, some of these challenges they face may no go away so easily and could prove problematic down the road.
Also, some companies are trying major new initiatives that may or may not work out. It’s a toss-up for most of them whether sell long-term holdings is worth the tax penalty, but these are certainly shares that you shouldn’t add right now.
Let’s take a look at these seven blue-chip busts:
7 Blue-Chip Busts That Could Use a Spark: AT&T (T)
The former Ma Bell, AT&T (T), is suffering at the hands of its success, ironically. As a major player in the U.S. mobile market, T stock is now getting squeezed by competition and a maturing marketplace.
According to statistics portal Statista.com, U.S. cell phone growth is expected to grow by a mere 8 million users by 2017.
That means everyone in the business is trying to steal everyone else’s customers. The problem for AT&T is that it’s one of the major infrastructure players and has to keep up with Verizon (VZ) on the coverage and 4G LTE front. That costs a lot of money. And when you’re not adding loads of new subscribers, the margins start looking anemic.
T’s acquisition of satellite TV provider DirecTV (DTV) may add some value, and certainly some cash flow. But it’s unclear if this diversification will hurt or help T stock in the long run.
7 Blue-Chip Busts That Could Use a Spark: Verizon (VZ)
Meanwhile, T as well as Sprint (S) and T-Mobile (PCS) are looking to eat into the two big players’ market share. And as prices for service, especially data, rise for the big carriers who are building a lot of the infrastructure, Sprint and T-Mobile don’t have those costs on a similar scale. They lease a lot of bandwidth from other carriers.
VZ already has its fiber optic FiOS network that has helped it on the content side for many years now. But the real question is, how long will it continue to help. And where does it go from here?
Another concern for Verizon is how it will continue to grow and support its massive network as interest rates rise and borrowing becomes more expensive. What’s more, as more data goes mobile, will its FiOS lose value over time?
The only real attraction for VZ stock at this point is its 4.6% dividend yield.
7 Blue-Chip Busts That Could Use a Spark: General Electric (GE)
Turning around a $277 billion company that has been wallowing for a decade or more is not an overnight process.
Yes, it’s cutting off its now-vestigial appendage GE Capital. Once it was a great engine of growth but has now turned into an engine of destruction. The government was about to consider GE Capital “systemically important,” which would put it under much stricter financial regulatory rules.
It was the final straw — GE decided to jettison the unit and get back to its knitting. It’s been doing a good job of selling its financial assets and unloading other extraneous properties. And it will like plow a lot of that money into massive share buybacks and dividend increases to make investors happy again.
But after those anticipated feel-good moves, there’s a real question about where GE goes from there, especially if global growth remains anemic.
That’s why this one is best left alone until it figures out what it wants to be in the next quarter century.
7 Blue-Chip Busts That Could Use a Spark: Exxon (XOM)
No could have guessed this time last year that as West Texas Intermediate crude was over $100 a barrel it would be trading at $61 a barrel today.
There are a combination of factors involved. Saudi Arabia and OPEC decided to teach the new U.S. producers a lesson and boost production to run them into the ground. You see, OPEC can produce oil much more cheaply than U.S. shale producers can and OPEC is therefore better hedged if prices drop.
Asia’s slowdown also hurt global demand and the slow recovery in the US has hurt domestic demand as well.
While this has certainly hurt exploration and production operations, it has also hurt blue-chip players like Exxon (XOM) because it is exposed to energy at every level. And no level is doing well when there’s a supply glut.
XOM stock is off 16% in the past year, so its 3.4% dividend is a moot point. Stay away from energy until there are some real green shoots of global growth because a company the size of XOM can’t rely on regional blips of positivity.
7 Blue-Chip Busts That Could Use a Spark: Southern Company (SO)
Southern Company (SO) is losing steam (pardon the pun) on a number of fronts. First it is the only utility building a new nuclear plant. And that is no small undertaking, especially when the federal and state governments aren’t doing much to help.
Plus, it’s no surprise that it’s over budget and delayed. In the long run this will be a valuable project, but now it’s a millstone around the company’s neck.
What’s more, SO is regularly ranked as one of the dirtiest energy producers in the U.S.
New air quality regulations are going to catch up to this major coal-fired plant player. Even its new nukes won’t make up for the kind of demand that SO is anticipating in coming decades, so that means building new, cleaner plants. And in a rising interest rate environment, that spells trouble for the stock.
Electricity is certainly a great business to be in, since it’s one of the biggest fundamental growth industries in the world. But that doesn’t mean every company — or every big utility — is a great buy.
Don’t get involved with SO right now, no matter how attractive its 5.1% dividend looks.
7 Blue-Chip Busts That Could Use a Spark: Dominion Energy (D)
The general rule for utilities like Dominion Energy (D) is when rates are low, buy and when rates are rising, sell. The reasoning is that these companies are usually adding or replacing power plants on a regular basis. And the bigger the company, the more likely they’re replacing plants and equipment.
While they’re certainly cash flow intensive businesses, they don’t pay for the plants up front; they finance them. And that means they have to pay market rates. That eats into profitability.
Also, big storms can cost a pretty penny and we’re entering into thunderstorm and tornado season in the South and Midwest.
Companies like Dominion are poster children for big utilities exposed to these threats. And since the market doesn’t like uncertainty, it walks away from these stocks in times like this.
D stock is now trading near its 52-week low. If it breaks through it could fall further before hitting a base. Right now there’s more downside risk than upside opportunity.
7 Blue-Chip Busts That Could Use a Spark: Exelon (EXC)
Exelon (EXC) is the nation’s leading competitive energy providers, meaning it sells its energy to other utilities, industries and governments as well as operates utilities in the mid-Atlantic that serve 7.8 million customers.
The biggest thing on EXC’s plate right now is its efforts to merge with chronically troubled Pepco (POM), that serves Washington, D.C. and southern Maryland. It’s having a hard time working through the D.C. council and quite frankly, it’s likely more trouble than its worth.
The problem with D.C. is that it’s run by federal politicians, or at least its budget is dictated by Congress. It’s going to be rough sledding trying to make money on this deal, no matter how good it looks on paper.
What’s more, energy is cheap right now, so that doesn’t help margins when you’re a major energy seller. EXC is also running utilities in cities and regions that are struggling right now, which means industrial and commercial customers are disappearing rather than expanding.
EXC stock is off 8% year to date and that may be just the beginning, especially if it actually completes the Pepco deal.
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.
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