The stock market is overvalued, and very few analysts disagree with that notion. How overvalued you think the market is really comes down to what metrics you care about.
The S&P 500 is trading at a price-to-earnings ratio that’s 20% higher than its earnings growth, so to me, blue-chip stocks are at least 20% overvalued right now.
And when you look at them on an individual-stock level, many of them are even more frothy.
Today, we’re going to look at 10 blue-chip stocks that are at particularly egregious valuations. In some cases, I think selling is the right call. But sometimes, it’s actually better not to cut bait entirely. Some stocks are still worth holding if you own them, while other situations might benefit from a simple hedge.
Here are 10 blue-chip stocks that are way too expensive right now, and what I think you should do if you hold them.
Blue-Chip Stocks Holding You Back: Johnson & Johnson (JNJ)
Action: Sell
Johnson & Johnson (NYSE:JNJ) ceased being a reasonably priced member of the blue-chip stocks club a long time ago.
Yes, JNJ offers well-known brands in both consumer staples and healthcare products, and it’s a long-time dividend payer. But it’s simply too expensive to hold on for what is a mediocre 2.8% dividend yield.
Johnson & Johnson, which has a market capitalization of $310 billion, trades at 20 times earnings. Meanwhile, earnings are only set to grow at 6.5% annually over the next five years.
Even if you give JNJ a premium for its great cash flow (which I do), the stock is still almost three times overvalued at today’s price of $114.
There are better options out there for both yield and growth. Sell JNJ and re-allocate that cash.
Blue-Chip Stocks Holding You Back: Merck (MRK)
Action: Sell
Merck & Co., Inc. (NYSE:MRK) is in a similar position to JNJ as far as blue-chip stocks go, and in one way, it’s even worse.
Unlike Johnson & Johnson, Merck is simply a Big Pharma play. But despite its presence in the healthcare space — much of which has roared ahead thanks to the aging of the baby boomers — MRK really hasn’t moved much for about two years now.
The valuation issue is awfully similar to JNJ, though. At $170 billion, Merck’s market cap is a whopping 31 times that of trailing 12-month net income. Yet earnings growth is slated to hit just 6% or so.
This makes absolutely no sense, even when you factor in MRK’s slightly better 3% yield.
Blue-Chip Stocks Holding You Back: International Business Machines (IBM)
Action: Sell
What does International Business Machines Corp. (NYSE:IBM) even do anymore?
The answer is that it’s trying to expand its presence in cloud and security services. The problem is, the growth there isn’t doing enough to stave off declines in its legacy businesses.
If I had to say one good thing about IBM, it’s that it’s very successful in repurchasing its own overpriced stock. But while this company has vision, it doesn’t have pacing, and it’s difficult to tell when or if a turnaround is really on the way.
On a valuation basis, its $161 billion market cap means it trades at 14 times earnings, which are barely growing organically.
Blue-Chip Stocks Holding You Back: Intel Corporation (INTC)
Action: Sell covered calls
Intel Corporation (NASDAQ:INTC) is not a moribund business as far as blue-chip stocks go. In fact, it is anything but that.
Intel is a vital chipmaker whose products serve basically the entire world. And its data center business is growing by leaps and bounds. So while INTC is expensive, you don’t necessarily need to exit or avoid it.
Intel trades at about 16 times earnings, while EPS growth hovers around 10%. I’d say fair value is probably 12x or 13x. My advice? INTC is already handing you a little less than 3% annually in income, so sell covered calls against Intel stock to generate even more cash.
If the stock gets called away, fine. If not, you’ve effectively lowered your cost basis, and you can sell more calls as you desire.
Blue-Chip Stocks Holding You Back: Altria Group (MO)
Action: Sell covered calls
On a strict valuation basis, it’s safe to say that Altria Group, Inc. (NYSE:MO) is overvalued as far as blue-chip stocks go. Altria’s $5.25 billion in net income means it trades at more than 26 times its $170 billion market capitalization.
That’s probably twice what Altria should sell for.
However — and this is kind of a key point — MO stock just keeps going up. That’s because for all of the anti-smoking legislation and movements out there, cigarettes are an addictive product, and that will continue to play in Altria’s favor.
Altria pays 3.5% in dividends, which is decent. Like with Intel, sell covered calls against your MO shares to see if you can squeeze even more cash out of it.
But if the stock gets called away, don’t buy back in.
Blue-Chip Stocks Holding You Back: Coca-Cola (KO)
Action: Sell naked puts/Sell covered calls
Sugary sodas are out. Water is in. Coke is no longer “it”. Neither is The Coca-Cola Co (NYSE:KO), which trades at nearly 25 times TTM earnings on virtually no growth. However, KO stock has a 3.4% yield that creates some income demand, and its cash flow and balance sheet look great.
Again, if you hold Coca-Cola, I would sell covered calls. If it gets called away, I would then sell naked puts … and if the stock is put back to you, sell covered calls again.
I like this tactic for KO (and not many other stocks) because it has a price floor that will keep the strategy reasonable for some time.
Blue-Chip Stocks Holding You Back: Kellogg (K)
Action: Buy puts
Don’t make me laugh. Kellogg Company (NYSE:K) is an obsolete company, selling high-carb and sugary cereals and snack treats in an era where everyone is going organic and healthy.
With a mere $700 million in TTM net income, K stock trades at a whopping 36x earnings on no growth.
Management also was incredibly stupid and generated a 500,000-person-strong boycott by picking a fight with Breitbart News.
Path of least resistance? Down.
Blue-Chip Stocks Holding You Back: General Mills (GIS)
Action: Buy puts
On the same theme, General Mills, Inc. (NYSE:GIS) is also rapidly approaching the trash bin of history.
The one thing GIS has going for it is that it’s not expensive as Kellogg, trading at about 21 times its $1.6 billion in TTM earnings. But that’s not much of a positive.
This is what’s known as a “sunset industry.” Sure people will always buy what General Mills and Kellogg sell, but they’ll do so in decreasing amounts going forward.
I don’t see GIS as being what it once was ever again, but the stock yields more than 3% right now. Given the nature of this very-long-term holding, many people who own General Mills are probably sitting on even more lucrative yields.
I would buy some form of long-term puts to take advantage of an inevitable decline.
Blue-Chip Stocks Holding You Back: Walmart (WMT)
Action: Sell
Are you kidding? In the age of Amazon.com, Inc. (NASDAQ:AMZN), even the superstores are going to get into increasing troubles.
Wal-Mart Stores, Inc. (NYSE:WMT) is hardly on the brink, sure. The big-box retailer sells about $500 billion worth of products every year. Moreover, it has plenty of cash flow, low-cost debt … and it trades at 15 times earnings.
But what I absolutely can’t stomach is that profits are expected to be almost flat going forward. That’s not enough reason to stick around for a 3% yield. Get out. No thanks.
Blue-Chip Stocks Holding You Back: HP Inc. (HPQ)
Action: Sell
What’s to say about another obsolete company that essentially sells commodities? Printers and computers are not unique items anymore.
HP Inc. (NYSE:HPQ) stands out from all of the other stocks here because, at just 10 times earnings, one might say that HPQ actually represents a value.
I say this is a value trap.
HPQ is yesterday’s news. Anything of real value has been spun off. The dividend of 3.6% is good enough to make me take notice, but with flat earnings and too heavy a position in the PC business in a post-PC world … you can do a lot better.
Don’t even bother with options. Look for something new.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
