The Dow Jones Index is having an amazing year. From its January low of 22,686, the Dow Jones Index has surged nearly 5,000 points to top 27,000 for the first time. With such huge gains, it’s time to start thinking about what Dow Jones stocks to sell.
As you’d expect, when the market as a whole rips so much, it sets up some great profit-taking opportunities in individual stocks out of the Dow Jones’ 30 components.
From vulnerable healthcare stocks to overpriced consumer staples plays and more, here are five Dow Jones stocks to sell before the market slides again.
Stocks To Sell: Boeing (BA)
It has been baffling watching Boeing (NYSE:BA) stock recently. You would have expected a massive correction in BA stock since several of the company’s jets crashed, calling into question the safety of the Boeing Max line of jets.
Instead, BA stock has been astoundingly resilient. This would be one thing if BA stock had already been cheap when the safety issues began. But no, BA stock wasn’t cheap at all. It had just quadrupled in value since early 2016 and reached its highest P/E ratio in years in March.
It seems that investors have forgotten that the airline industry is cyclical. Yes, oil prices are low right now. Airlines are making a lot of money for the moment. When airlines make huge profits, they order planes. In fact, they order too many planes. This cycle has happened every few years dating back to the 1960s. Yet investors seem to think this commercial aviation boom will go on forever. It won’t.
On the military side, yes, orders have been up. But analysts modeling this upturn in defense spending indefinitely will also be disappointed. What happens if and when the Republicans lose power in Washington? There’s also the little matter that we have no idea how bad the issues will be from the Boeing Max situation. BA stock is still really expensive.
The chase for yield has investors rushing back into a lot of slow-growing defensive companies. The rationale makes sense on the surface. Lower interest rates mean that bonds are less attractive investments.
Yet investors, especially retirees, still need current income. So they sell their bonds and other fixed income holdings to buy stocks with larger yields. Coca-Cola (NYSE:KO) is one such popular stock.
It’s not hard to see the appeal of KO stock as a bond alternative. It yields more than U.S. Treasuries or bank CDs while offering a dividend that Coca-Cola has increased every year for decades on end.
However, cracks are forming in Coca-Cola’s growth and income story. Namely, there’s hardly any growth.
Soda sales have plunged in America and other developed markets. Emerging market growth has largely offset this so far, but there are limits to that. Soda sales may drop even more sharply going forward as more jurisdictions implement sugar taxes. As a result, Coca-Cola has hardly grown in recent years – it has taken on more debt and boosted its dividend payout ratio to keep the yield going up. That works for a while, but without organic growth, Coca-Cola’s dividend stream will turn to a trickle over time.
Based solely on earnings, for a slow (or at times no-) growth company like Coca-Cola, you’d rarely pay more than 20x earnings, if that. As such, it’s hard to justify KO stock being worth more than $45 now. If you own KO stock solely for the dividend, it’s a fine holding. But don’t anticipate much, if anything, in the form of share price gains over the next year or two.
One has to wonder if McDonald’s (NYSE:MCD) is about to launch CBD-infused burgers. Or perhaps a national Beyond Meat (NASDAQ:BYND) burger rollout. That is to say, investors are bidding up MCD stock like it’s a hot craze, even though its business momentum is decidedly pedestrian at best.
In fact, many of the company’s franchisees have been complaining. All-day breakfast greatly increased complexity for operators and raised labor costs without doing much for overall revenues. McDonald’s is also asking its franchisees to make extensive store overhauls even though the local operators haven’t exactly been rolling in cash flow lately. Franchisees sent a harshly-worded letter around earlier this year demanding that:
“We can NOT afford the waste that a ‘one size fits all’ reinvestment program creates […] We must allow our owner operators to take back control of the reinvestment that is happening, stop the useless and problematic investing, and focus our reinvestment in what will actually produce a return on investment (drive thrus and kitchens).”
Over on Wall Street, however, no one seems worried about McDonald’s questionable strategy in recent years. MCD stock is up 36% over the past 12 months and is up more than 22% year-to-date. This has led McDonald’s to sport a bloated 28x P/E ratio. Investors are likely to get indigestion when they look back at paying more than $200 a share for MCD stock.
UnitedHealth Group (UNH)
If you watched the first Democratic presidential debate, you probably won’t be too surprised by this pick. A sizable number of candidates, when asked if they would get rid of private for-profit health insurance, raised their hands in affirmation. The political world has moved a lot since 2016, when Bernie Sanders’ suggestion of abolishing private health care seemed radical.
Now, there’s a decent chance that the eventual Democratic nominee will be pushing to outlaw or at least greatly curtail private insurance going forward. Would that nominee, if elected, be able to push legislation through what will likely still be a Republican Senate in 2021? Probably not.
Still, do you want to own a private insurer like UnitedHealth Group (NYSE:UNH) ahead of the election? Absolutely not. Even if you think the Republicans will keep the White House, think back to 2015.
Hillary Clinton went on the attack against Martin Shkreli and biotech firms for jacking up prescription drug prices. Biotech stocks collapsed shortly thereafter. Private health insurers are about as popular as nuclear waste dumps with a large portion of the electorate. With the presidential election still a year away, politicians have plenty of time to threaten and demonize firms like UnitedHealth. Sell this recent pop in UNH stock; it’s toxic given the political environment.
Johnson & Johnson (JNJ)
On a similar note, Johnson & Johnson (NYSE:JNJ) also exposes investors to a great deal of political risk ahead of the election. JNJ is a highly diversified business with many consumer care products that are (mostly) above reproach.
But JNJ also sells a lot of prescription drugs, and both Trump and the Democrats are making loud noises about going after pricing, which would cut into JNJ’s margins. Trump’s efforts to curtail drug prices appear to be stalled for the time being. But make no mistake, the issue is a perfect one for politicians to use to drum up votes during election season.
Johnson & Johnson also has its liability issue related to baby powder products which allegedly led to cancer. It is exposed to large verdicts against it related to this. Presumably JNJ will be able to reduce its liability greatly over time as cooler heads prevail, but for now, it’s another big overhang on JNJ stock. If JNJ stock were cheaper, you could discount the political worries; it’s a very strong and diversified company. But at this valuation, JNJ stock could easily have more downside before it bottoms.
At the time of this writing, Ian Bezek owned JNJ stock. You can reach him on Twitter at @irbezek.