While the market’s hot run since November eventually cooled off in early March, stocks have become resurgent once more and brought the S&P 500 and Nasdaq Composite back up near all-time highs.
But this quick rally is already showing signs of weakness, and investors would do well to start scouring their portfolios for stocks to sell in hopes of collecting profits before they start to disappear.
It’s a lousy market for buyers right now, as deals are few and far between. Stocks have been bid up like mad, and the S&P 500’s price-to-earnings ratio now sits at multiyear highs north of 25! That’s bad news if you’re looking for new investments … but also bad news if you’re typically slow to sell your winners before they start to seriously recede.
The following is a list of seven blue-chip stocks to sell amid their precarious positions right now. These are sells for a host of reasons — some are simply valued far too high, others are showing cracks in their operations, and others are giving off the telltale signs of slowing growth that typically send momentum investors rushing for the exits.
In no particular order, here are seven blue-chip stocks you should dump soon.
Blue-Chip Stocks to Sell Now: Coca-Cola (KO)
The Coca-Cola Co (NYSE:KO) has seen better days.
The beverage titan is a veritable cash cow that churned out $6.5 billion in free cash flow last year thanks to an extremely healthy margin of nearly 16% of last year’s sales of $41.9 billion.
However, sales peaked in 2012 at $48 billion, and free cash flow in 2014 at $8.2 billion.
Granted, Coca-Cola has divested bottling operations recently, and it still pays a healthy 3.28% dividend yield. But revenues are projected to fall 16% this year and 12% next year as management looks to become nimbler and more profitable. On that front, profit growth looks decent — but not great — by comparison, with analysts projecting earnings of $2 per share by the end of next year, or just 2.6% better than Coke’s earnings for 2016.
It’s entirely possible that Coca-Cola could get some help from Donald Trump if the president is able to knock the strong U.S. dollar down, but that still doesn’t fix problems such as America’s exodus away from sugary drinks and into more healthy options, including bottled water.
Factor in a forward price-to-earnings ratio of 22 and a sky-high price/earnings-to-growth ratio of 7.68 (1 is considered “fairly valued”), and that’s far too rich for any company struggling to grow. Those high valuations can resolve themselves in one of two ways — growing profits, or shrinking share prices — and KO seems fated for the latter.
Blue-Chip Stocks to Sell Now: Costco (COST)
Costco Wholesale Corporation (NASDAQ:COST) is a rare bright spot in the brick-and-mortar space right now. Consumers love its discount warehouse positioning, where they can comfortably pay a $55 annual membership fee and buy goods in bulk at a minimal markup.
The problem is, everyone knows it right now, and has piled into COST, making it an exceedingly crowded trade, and an overly expensive one that’s due for a painful reversion.
Costco currently offers only modest growth to back up its high valuation. COST shares traded at 30 times forward earnings projections, and that will drop to only 27 if the company hits its own internal expectations. Sales growth is likely to continue a predictable path in the mid-single digits.
That lofty valuation leaves considerable downside risk, especially if the company slips operationally. A fall to just 20 times earnings (still not cheap, but more reasonable), would mean a share price decline of 33%.
That’s an awful-case scenario, but a realistic one. But even a more muted bearish case is that upside is severely limited right now, as Costco would have to grow its earnings by double digits for about a decade to justify the current price of COST shares.
Blue-Chip Stocks to Sell Now: Amazon (AMZN)
There are a host of positives one has to acknowledge before making this call. The firm’s Amazon Prime service is a consumer steal at $99 annually for its perks of free two-day shipping, Prime entertainment and other benefits. Its business model has almost single-handedly altered the brick-and-mortar retail space for good.
Meanwhile, its cloud offering, Amazon Web Services (AWS) is growing rapidly, and gives Amazon overall a foothold in the convergence of mobile communication, accessing the Internet, and utilizing computing power in the cloud.
But there are some slight cracks in the bull case, and that’s a problem for a $190 billion company that has run up 55% in just 12 weeks.
For one, AWS might be growing, but the pace of that growth slowed considerably, to 42% year-over-year from Q1 2016’s 64% growth. That has been a growing worry ahead of each of the past few earnings reports, and a poor number in the future is a very likely trigger for a massive pullback.
Moreover, while valuation tends not to matter when the markets are broadly climbing higher, people take a much closer look at that — and the breakneck profits they’ve already reaped — when the market starts to dive. Considering AMZN trades at 74 times forward earnings, a PEG of more than 4, a price-to-sales ratio of 3.2 and a free cash flow multiple of 45, the stock looks particularly vulnerable to profit taking should the “Sell in May” phenomenon really take hold this year.
Blue-Chip Stocks to Sell Now: United Continental (UAL)
At this point, we’re all well aware of the giant faux pas United Continental Holdings Inc (NYSE:UAL) recently committed, but just as a quick recap:
United found itself ensnared in a “horrific” passenger ordeal when it brought in airport security to forcibly remove a passenger from a flight it had oversold. The incident was caught on video, went social and set the world afire with viral outrage.
The incident speaks to the contentious relationship that United and certain other airlines have with their customers. After years of continuous industry bankruptcies and losses, the business model has shifted to charging customers for add-on services, including cushier seats, checking bags, and even food online.
Industry consolidation is also boosting profits at the largest domestic airlines, but the industry remains economically sensitive. It is also subject to travel downturns, which can occur during recessions or when geopolitical or terrorist fears rise.
Here, United’s valuation is quite reasonable at a forward P/E of about 10. But this is a volatile industry to begin with, and UAL just gave itself a big, black mark that will be difficult to erase, at least in the short-term. Meanwhile, profits for this year and the next are both expected to come in under 2016’s figures.
At best, UAL’s upside is limited. At worst, United has more downside to spare as the ripple effect from its poor crisis management reveals itself in quarterly results.
Blue-Chip Stocks to Sell Now: Transocean (RIG)
Transocean Ltd. (NYSE:RIG) isn’t the most recognizable of consumer names, but it does operate the world’s largest fleet of deepwater drilling rigs.
The problem is, it is expensive to drill for oil and gas far out in the ocean, and these days many wells are deeper and harder to get to than in years past.
Deepwater drilling made a lot more sense with oil in triple digits, but naturally the big dip into $30/barrel prices from 2014 to 2015 killed operators like Transocean. There was a flicker of hope late last year and early in 2017, with recovering oil prices and post-election optimism driving RIG shares nearly 90% higher between their October lows and January highs.
However, oil prices have dipped back below $50 per barrel. Production costs are estimated closer to $60 per barrel.
You do the math.
Meanwhile, onshore shale drilling is growing more competitive, adapting to low oil prices and bringing average production costs down to closer to $40 per share. Several years ago, the deepwater guys spent furiously to build rigs and capture epic finds off the coast of Brazil. This has hurt the space, and brought Brazilian giant Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) to its knees.
Analysts project Transocean will lose 58 cents per share this year, and more than a dollar next year. Sales could plummet 33% to below $3 billion in 2017, and only stabilize next year.
Transocean is only OK if prices rebound from here. I suggest bailing, especially if you’re sitting on big profits from the past few months.
Blue-Chip Stocks to Sell Now: Morningstar (MORN)
Morningstar Inc (NASDAQ:MORN) is a great company at a bad valuation.
This company revolutionized the analysis of the mutual fund industry. Its investment style boxes have become an industry standard, championed by investment consultants and advisers alike.
But a great history doesn’t necessarily translate into a great future or a great investment.
Growth is only modest, and the valuation is just too high. Analysts are projecting just 5% sales growth this year and next. Earnings are expected to bleed out by 28% this year, from $4.41 per share to $3.18, and while they will recover next year, they’re only expected to reach $3.54.
Meanwhile, the forward P/E sits at nearly 21, and the P/S is nearly 4. It’s not a new problem, either — valuation is the reason shares haven’t really moved much in almost a decade.
New CEO Kunal Kapoor plans to offer in-house mutual funds to push the company forward, but that path is unsure, and does have significant downside if it doesn’t pan out. Sell it if you hold it, avoid if you don’t.
Blue-Chip Stocks to Sell Now: Sears (SHLD)
Lastly, we have a company that once was a blue-chip, though it’s lost that designation in the eyes of most investors by now.
Sears Holdings Corp (NASDAQ:SHLD) is one of several traditional operators that are struggling to survive in the current environment, and it’s so bad right now that not only is this a sell, it’s a great shorting candidate.
Most of the air has been let out of this tire over the past decade. In April 2007, the stock price exceeded $140. Today, it’s down near the $11 mark.
But until a stock hits zero, there’s still plenty of downside, and that’s where Sears sits today. Analysts project sales to decline another 20% this year to $18.2 billion, resulting into a massive loss of $12.33 per share. Free cash flow generation … well, it hasn’t been positive since 2010, and that’s not about to change.
It’s so bad that Sears even doubts if it can remain in business, or as a going concern. Merging with Kmart back in 2004 seemed a reasonable bet at the time, but it has been decades since either retail chain has successfully competed.
Strip malls and more nimbler operators including Target Corporation (NYSE:TGT) and Kohl’s Corporation (NYSE:KSS) started nipping at the heels of Sears many years ago, and now Amazon is putting it out of its misery.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.