For the past month or so, investors have seemingly all gravitated to the same stocks. These are high-yield, low-beta, companies that produce goods or services that typically thrive in down markets.
Clearly, this behavior suggests that investors are gearing up for a bear market.
The problem is that all these safety stocks are no longer all that safe. Consumer staples, utilities and other let’s-hunker-down-and-wait equities have become overpriced, lack the growth to support higher multiples and now have more downside potential than the stocks that investors are trying so desperately to avoid.
Does that mean you should avoid typical safety stocks? Not exactly.
It just means that you should avoid this set of 10 such blue-chip stocks that have nothing left to give — except maybe losses. In no particular order …
Blue-Chip Stocks With Nothing Left to Give: Procter & Gamble (PG)
Procter & Gamble Co (PG) is up about 4% year-to-date and is just about a buck away from its 52-week highs.
Considering that PG stock offers a 3.2% dividend yield and is backed by a business that centers around laundry detergent, toilet paper, razors, and other products alike, it is no surprise that investors are rushing to Procter & Gamble in times of distress.
The problem is that PG stock trades at 21 times next year’s expected EPS, and because of currency exchange, sales at Procter & Gamble will likely experience their second consecutive year-over-year decline.
In other words, investors are paying a steep price for a company that lacks growth and is under margin pressure. So don’t expect PG to remain a safe haven much longer.
Blue-Chip Stocks With Nothing Left to Give: Exxon Mobil (XOM)
Crude oil prices have recovered from their lows, but they’re still more than half from 52-week highs.
Meanwhile, Exxon Mobil Corporation’s (XOM) business is directly tied to the price of crude, yet its stock price is hovering around highs last seen in early 2015.
This is a company that’s on pace for its fifth consecutive year of sales declines, and we’re not talking about moderate losses, either. If XOM meets expectations for $226 billion in full-year revenue, it will be a decline of $33 billion from last year, and $168 billion from the year prior.
While asset sales are partly responsible for these declines, much is organic. And at nearly 21 times next year’s earnings, XOM stock is neither cheap nor favorably positioned to experience long-term growth given the uncertainty that surrounds oil prices.
As a result, I would expect Exxon’s party to end soon.
Blue-Chip Stocks With Nothing Left to Give: Microsoft (MSFT)
Microsoft Corporation (MSFT) has fallen about 6% in the last month, but the stock is hardly cool — the company has nearly doubled over the past five years, and it’s only a few percent away from its all-time highs.
That’s pretty incredible given that margins have nearly been cut in half, and the company has failed to secure any organic growth. Instead, MSFT was able to grow overall revenue with the acquisition of Nokia Corp (ADR)’s (NOK) handset business and has turned investors’ focus away from its suffering businesses and instead toward its smaller, faster-growing units.
MSFT has done a tremendous job at marketing its strengths and hiding its many weaknesses.
Those weaknesses? Well, at nearly 18x next year’s EPS, MSFT is far more expensive than competing big tech companies, most of which have the same problems or are performing far better.
For that reason, I would not expect MSFT to go much higher.
Blue-Chip Stocks With Nothing Left to Give: Home Depot (HD)
Home Depot Inc (HD) has had a tremendous run, but let’s face it: Retail is in the dumps, and HD stock is one of the last few retailers sitting near 52-week highs.
Fact is that big retail has become one of the cheapest industries in the market. Yet, HD stock supports a multiple of 19 times FY2017 EPS. Given the bearish sentiment that surrounds all of retail right now, Home Depot has become a very risky stock to own.
At the very least, HD stock is priced for perfection and lacks upside from this point forward.
Blue-Chip Stocks With Nothing Left to Give: McDonald’s (MCD)
McDonald’s Corporation (MCD) struck gold when it decided to implement all-day breakfast. That move has single handily added 30% to McDonald’s share prices over the past year.
Even then, revenue at MCD will still decline 3% this year and 6% next year.
Those expected sales drops are too big for a large-cap company that now trades at 21 times forward estimates. So while MCD shares may be able to hold around $130 thanks to stock buybacks, it’s hard to imagine that McDonald’s goes much higher and supports an even higher multiple with those top-line losses.
Blue-Chip Stocks With Nothing Left to Give: Colgate-Palmolive (CL)
Colgate-Palmolive Company (CL) is very much like Procter & Gamble. It is right around 52-week highs, lacks any growth whatsoever, faces margin pressure … and yet trades at an inflated multiple.
In fact, CL is far more expensive than even PG. The stock trades at almost 24 times next year’s EPS, yet sales are expected to decline 3% this year. Furthermore, Colgate’s 2.1% yield is not all that impressive compared to other safety investment plays.
As a result, Colgate-Palmolive shares look like they could be pressured and face significant weakness in the months ahead.
Blue-Chip Stocks With Nothing Left to Give: Clorox (CLX)
Clorox Co (CLX) rounds out a household products space that includes Colgate and P&G. And in many ways, CLX is the superior company of the bunch.
The big positive way in which Clorox stands out is that it actually has growth! CLX is expected to grow 2% this year and another 4% next year.
The problem — even more so than with PG and CL — is price. CLX trades at a whopping 25x next year’s earnings. That’s more expensive than Alphabet Inc (GOOG, GOOGL)!
While I understand the push for safety by owning this basket of stocks, paying such a high multiple for no or limited growth is unwise. Essentially, all of the potential long-term upside is priced into these stocks, and then some.
Blue-Chip Stocks With Nothing Left to Give: Verizon (VZ)
Verizon Communications Inc. (VZ) has soared 11% this year — pretty good for a “stodgy” telecom pick — but while the stock still looks cheap at just 12 times forward earnings, one must consider both its debt and outlook when valuing the company.
Verizon decided to acquire complete ownership in its wireless business just before major changes took place within the U.S. wireless space, caused by T-Mobile US Inc’s (TMUS) aggressive pricing. It was a bad deal for VZ, causing its debt to double and has virtually zero positive impact on the company’s top or bottom line.
With sales expected to be flat to slightly lower over the next two years, versus a competitor in AT&T Inc. (T) whose revenue will grow 15% in the same span, VZ looks like an inferior company trading at the same multiple.
As this fact becomes known, expect a higher rotation of money into AT&T and out of VZ, thereby putting pressure on the latter.
Blue-Chip Stocks With Nothing Left to Give: Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ) is one of the most diversified companies in the market. Not only does it have a successful consumer product business, but it also is a leader in pharmaceuticals and medical devices.
JNJ is a terrific company, with low-single-digit growth. However, it just does not have tremendous upside from this point forward.
With so much pressure on the healthcare space, Johnson & Johnson is too expensive at 16.5x FY2017 EPS. Or at the very least, it is properly valued and nothing more.
In a market that is flirting with bigger losses, and a company with close ties to healthcare, I would not expect much larger gains from JNJ stock in the near future.
Blue-Chip Stocks With Nothing Left to Give: Facebook (FB)
Facebook Inc (FB) is one of the most exciting names in tech right now. The stock is currently trading near all-time highs, growth is accelerating, and with new products on the march, it certainly seems that growth will remain robust for the foreseeable future.
While I acknowledge all of these things to be true, I also realize that there is no way that Facebook is worth $340 billion! Yes, FB is going to grow 45% this year and another 30% plus next year … but even then it will have just $35 billion in annual revenue. Compare that to Amazon.com, Inc. (AMZN), which has a similar market cap but did $107 billion in sales last year.
That said, it’s also tough to imagine that Facebook loses 30% of its value, or gets cut in half, or suffers any sort of game-altering selling.
Investors should simply expect that at some point, fundamentals will have to catch up to the company’s stock value, and that means a long period of flat trading in FB sooner than later.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.