One of the tricky things about investing in this market is that many “safe” stocks, or “blue-chip stocks,” are neither. The notion that a stock is “safe” because it is a legacy name, or it has carried the moniker “blue chip” for decades means absolutely nothing when the stock is vastly overpriced, pays a small dividend and isn’t growing.
Alternatively, many small or mid-cap stocks are entirely overlooked because they aren’t sexy, may not pay a dividend, or operate in a space that is misunderstood or somehow distasteful (in true Peter Lynch fashion).
With that as a backdrop, here are four stocks to sell and four stocks to buy that fit the criteria for each category.
Blue-chip Stocks to Sell: General Electric (GE)
General Electric Company (NYSE:GE) is the first of four blue-chip stocks to sell and it is a shadow of its former self.
This once mighty conglomerate could do no wrong, which shows investors why it is important to have a visionary at the top and not just a “game manager.” Jeffrey Immelt wasn’t even a game manager. He just rested on the laurels of the company’s past success and was unable to pivot GE to where it needed to be in an ever-changing world.
Net income is down from $14.66 billion in FY12 to $9.77 billion in FY16. The yield is just under 4%, while net income is falling, and that doesn’t support owning the stock.
Blue-chip Stocks to Sell: Pfizer (PFE)
Pfizer Inc. (NYSE:PFE) is the perfect example of blue-chip stocks to sell, as it is company that many call “safe” and a “blue chip.”
PFE certainly has tremendous free cash flow. And if it were a company that could then turn that cash flow into a 5%+ dividend and grow earnings around 5% or more, I’d at least have to consider it was valued fairly. The problem is that PFE’s dividend is 3.5% and earnings-per-share are growing at 6% annually, but that’s not net income growth because it doesn’t account for share repurchases.
With PFE stock trading at 14x EPS, it’s vastly overvalued and not worth taking a risk given its forward growth prospects.
Blue-chip Stocks to Sell: Kellogg Company (K)
Kellogg Company (NYSE:K) stock is the laughingstock of blue-chip stocks to sell. It has reached the point where its CEO just bailed after steering the company for the past 6+ years into a whopping 10% return.
Food companies are not the place to be, and when Kellogg waded into the political fray last year, it was a stupid move that just hurt the company more.
Why own Kellogg stock when it trades at almost 30x earnings, and those earnings continue to decline amidst falling revenue? A 3.4% dividend isn’t terribly attractive and people aren’t eating cereal much anymore.
Blue-chip Stocks to Sell: Walmart (WMT)
The gorilla name in cheap retail is now the gorilla running back to the jungle. The truth, if you can believe it, is that Wal-mart Stores Inc’s (NYSE:WMT) revenue is barely growing at 2%.
Meanwhile, competition is fierce.
The “under $1” stores started selling food ages ago, and Amazon.com, Inc. (NASDAQ:AMZN) has been eating everyone’s lunch for years. Sure, WMT appears to be growing at about 5% annually, which isn’t bad for a company of its size, but owning WMT when it trades at 19x earnings — almost four times its growth rate — is nuts.
Stocks to Buy: Ashford Hospitality Prime Inc (AHP)
Ashford Hospitality Prime Inc (NYSE:AHP), a hotel real estate investment trust (REIT) that was caught in a misguided proxy fight early last year, is the first of our stocks to buy.
After being defeated in court, the activist fund realized that rational discussions with management might yield the results they wanted … and they have. AHP increased its dividend (now 6.27%), sold non-core properties, is buying back stock, and most importantly, it has 110% upside.
That’s because its market cap is less than half of what the private market values similar holdings at based on an average of estimated cap rates. I believe AHP will be sold for around $20 per share.
Stocks to Buy: Pandora Media (P)
Pandora Media Inc (NYSE:P) is a special situation for among our stocks to buy.
Following Sirius XM Holdings Inc. (NASDAQ:SIRI) making a $480 million strategic investment in Pandora, I determined that SIRI’s majority shareholder John Malone, of Liberty Media Formula One (NASDAQ:LMCA), would eventually buy out the rest of the company.
Malone’s modus operandi is to purchase stakes in companies that have solid cash flow, and eventually buy out the whole shebang. Indeed, SIRI offered $15 per share for all of Pandora last year. I think a deal is eventually made at around $12, and with Pandora currently trading below $8, that’s a big win.
Stocks to Buy: Federal National Mortgage Association (FNMA)
Federal National Mortgage Association (OTCMKTS:FNMA) is my most speculative selection in our stocks to buy.
This is based on the idea floated by hedge fund manager Bill Ackman that both Fannie Mae and Freddie Mac (and you can buy either) are now on solid enough footing and there is substantial upside.
The government owns 80% of FNMA, but the GSE has no capital. There is bipartisan support to ask the private sector to recapitalize the entity and, if done before the next recession, then the government won’t have to do another bailout if mortgages default again. If that private capital gets placed, and I bet Warren Buffett will lead the way, then there’s substantial upside.
Stocks to Buy: BP plc (ADR) (BP)
BP plc (ADR) (NYSE:BP) has become a deep value play in the energy sector.
I think you must have energy exposure in your long-term diversified portfolio, and I discuss that at length in my stock advisory newsletter, The Liberty Portfolio. With the bulk of the Deepwater Horizon payments behind it, BP has finally turned the corner and it is the last of our stocks to buy.
Revenue is creeping upwards, it has operating profits again and the stock has awakened from its slumber, moving decisively out of a base and rising almost 25% since earlier this year.
I think patient investors will be rewarded.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns shares of AHP, P, FNMA, and BP. 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 [email protected].