Just because blue-chip stocks are big and usually stable doesn’t mean they can’t get overextended.
Even the bluest of the blue-chips race out of control sometimes, and price themselves out of reach for discerning investors.
And right now, eight blue-chip stocks are serving as perfect examples.
Although current shareholders don’t necessarily have to get out, would-be investors mulling any of these picks might want to be patient with any entries. All of them have the potential to be true “buy and forget about ’em” names, but all of them also look like they need to take a break from their current rallies.
In no particular order …
Blue-Chip Stocks That Need to Cool: Palo Alto Networks (PANW)
There’s no denying the world’s not really ready to fend off any and all cyberattacks. Case in point: It was less than two weeks ago that the U.S. Internal Revenue Service was hacked, with 100,000 individual tax returns being made accessible to hackers.
It was just one of many such attacks that has thrust cybersecurity name Palo Alto Networks (PANW) into the spotlight, and pushed PANW stock up more than 300% since late 2013.
There’s just one problem with stepping into PANW stock after such a big run-up, and it’s not the sheer size of the gain: Unlike most other blue-chip stocks, Palo Alto Networks isn’t net-profitable (operational, yes, but not on a GAAP basis), and isn’t expected to be anytime.
While investors have overlooked heavy capital spending thus far, the market’s patience could break in an instant.
Blue-Chip Stocks That Need to Cool: Mylan (MYL)
Whether Teva Pharmaceutical (TEVA) actually acquires Mylan (MYL) has largely become irrelevant. MYL stock has soared 26% since April when the idea was first floated, and is up 62% since October’s low.
Even if Teva Pharmaceutical is willing to continue its overtures, any price the company would be willing to pay has likely already been priced into the value of MYL stock over the past 10 weeks.
Indeed, even more concerning than a maximum value for Mylan shares is the possibility that Teva finally backs off and decides it’s not worth the trouble. Tantamount to playing a little “too hard to get,” holding out for a better and better price could end up backfiring on owners of MYL stock.
Better to take the premium price you know you can get while you know you can get.
Blue-Chip Stocks That Need to Cool: Goldman Sachs (GS)
Investment bank Goldman Sachs (GS) has dished out a nice 120% gain over the course of the past three years, largely in step with rising earnings stemming from a booming IPO and M&A market.
Earnings per share have exploded from only $4.51 in 2011 to $17.07 per share last year, in step with an initial public offering bonanza. Last year’s 273 IPOs were the most since 2000’s 406 new public offerings.
So why would anyone want to bail out of GS stock when the IPO train is running full speed ahead?
Because that train is running out of fuel.
While the union of Broadcom (BRCM) and Avago Technologies (AVGO) is admittedly a big one, it’s also an exception to the recent norm. IPO mania and the M&A craze are actually positioned to slow now, with most of the meaningful would-be deals likely already being done. Blue-chip stocks are also less and less prevalent on the landscape, suggesting that the deal-making and IPO cycle has run its course.
In other words, earnings growth for Goldman Sachs could hit a wall nobody sees coming.
Blue-Chip Stocks That Need to Cool: Macy’s (M)
Congratulations to anyone who was lucky enough, or smart enough, to step into Macy’s (M) at any point in time since early 2009.
M stock has been the poster child of consistent gains during that time, gaining more than 1,100% since its late 2008 low. It’s the kind of reliable, pronged gain only the best of the best blue-chip stocks are capable of dishing out after a crisis like the U.S. saw.
As they say, though, all good things must come to an end, and with a big profit-taking bomb just waiting to be ignited, it would be best to be out of Macy’s sooner rather than later.
The clincher for the argument it might be time to lock in any gains with Macy’s and head for the exit: The company’s most recent earnings report. Macy’s 56-cent profit per share of M stock not only missed estimates, but was lower than the year-earlier comparable figure of 60 cents.
The market (mostly) shrugged the miss off at the time, but the retailer has become a 50/50 proposition on the beat/miss front over the past couple of year. With the risk-vs-reward scenario now changing for the worst, Macy’s is skating on thinner ice than most investors suspect.
Blue-Chip Stocks That Need to Cool: Eli Lilly (LLY)
Of all the blue-chip stocks in desperate need of a cooling-off period, Eli Lilly (LLY) may be the simplest one to understand. Thanks to the 14% gain the stock has made this year so far, LLY stock is valued at a frothy — and unsustainable — trailing P/E of 38 and a still-frothy forward-looking P/E of 22.
Yes, Eli Lilly and AstraZeneca (AZN) recently announced a very compelling oncology drug-development partnership while Cyramza was approved for more uses. The near-term pipeline also looks pretty juicy.
Problem is, all of the foreseeable upside is already factored into the price of LLY stock right now.
Blue-Chip Stocks That Need to Cool: Rockwell Automation (ROK)
When it comes to manufacturing automation, Rockwell Automation (ROK) is the cream of the crop. That’s not about to change anytime soon either.
But just because a company ranks among the market’s top blue-chip stocks doesn’t mean the stock is a must-have at any price.
That reality applies to ROK stock right now. Up nearly 12% since its late-April earnings announcement and up 26% since October’s low, there’s not a lot of upside left.
In fact, ROK stock might be overextended.
Giving credit where it’s due, it was Zacks that pointed out last month how a tepid crude oil market had already forced Rockwell Automation to reel in its full-year revenue guidance. The company was also seeing soft demand for its control product.
Throw in the negative impact of a still-strong U.S. dollar, and ROK stock is just one piece of bad news away from a significant setback.
Blue-Chip Stocks That Need to Cool: Aetna (AET)
To say the advent of Obamacare has created a windfall for healthcare plan providers like Humana (HUM) and Aetna (AET) would be an understatement. The Affordable Care Act, which became law at the beginning of 2014, has pushed droves of new customers into the arms of Aetna and Humana, with revenue and profits still soaring … much like HUM and AET stock.
More recently, chatter of mergers within the health plan space catapulted HUM stock to dizzying heights, with Aetna rising in sympathy.
Enough is enough, however.
Clearly Aetna and Humana aren’t the same company, but they are in the same boat. And, some observers are finally starting to question Humana’s valuation. As Susquehanna’s Chris Rigg explained:
“The move in the HMO group on Friday [May 29th] gives us pause as nowhere is it mentioned that any parties are currently in formal discussions. We cannot definitively rule out any deal with Humana, but from a fundamental standpoint Humana’s current share price is not justifiable — Humana shares are trading at 21.7x 2016 consensus EPS versus large-cap industry peers ex-UnitedHealth (UNH) at 15.3x…
We find the current M&A chatter around Humana ironic given that if indeed a deal comes to fruition then it would seem as if the logical bidders have been bidding against themselves. Over the last several months Humana shares have been supported, despite lackluster quarterly results, by competitor management teams by projecting the notion that significant M&A was at hand — particularly in the MA segment… in our view Humana’s valuation prior to Friday’s media frenzy already had an M&A premium of two to four multiple points because of the well-known M&A speculation — shares on Thursday closed at a 2016 P/E of 18.1x whereas we think absent the M&A chatter that Humana’s valuation would have been in the 14-16x range (in-line with the other large caps ex-UnitedHealth).”
Great, but what’s that got to do with Aetna?
For the same reason HUM carried AET stock higher, it could just as easily carry overbought Aetna shares lower … a lot lower. Like HUM, AET stock is arguably overpriced at its trailing P/E of 20.
That all said, Humana is due for a pullback as well.
Blue-Chip Stocks That Need to Cool: Yum Brands (YUM)
Last but not least, we have Yum Brands (YUM).
With just a quick glance at the headlines and the recent action from the stock, it would be tough to find something not to like about YUM. The company recently announced it was going to weed out some of the artificial coloring and flavoring currently found in its foods, and consumers are loving it.
More recently, RBC Capital Markets ramped up its target on YUM stock from $93 to $103. At the current price near $90, Yum Brands remains in a bigger-picture uptrend, with plenty more room to keep chugging before it bumps into that target.
So what’s not to like? That’s the point.
As the old Wall Street adage goes, the time to buy a stock is when nobody else wants it, and the time to sell a stock is when everybody else wants it. With most investors currently recognizing it’s one of the best blue-chip stocks out there, this may be the ideal time to be a YUM stock contrarian and let it cool off before jumping in.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.