Most analyst’s expectations of a challenging first quarter for the S&P 500 were on point. S&P 500 companies posted an earnings surprise by a minuscule 1.6%, the smallest since 2008. Accordingly, it’s no surprise that the operating performance of many top companies is unlikely to impress, given dwindling economic conditions. Hence, it’s perhaps the right time to sell some top blue-chip stocks right now.
While some powerful consumer brands held their ground during the recent earnings season, the majority capitulated under pressure. Cost cuts became increasingly crucial for blue-chip stocks to dish out quarterly beats of Wall Street estimates. The powerful operating leverage which drove profit margins to record highs during the pandemic became significantly less common.
Nevertheless, a few performed considerably worse than others, and are likely to struggle under the weight of economic pressures. Here are three such companies I think are worth avoiding right now.
American fast-food giant McDonald (MCD) benefitted from the rampant inflation seen over the past year. The company’s profitability increased compared to its 5-year historical averages, while foot traffic dropped.
However, McDonald’s operating performance will likely take a significant dent , as price increases slow. Revenue growth rates have been negative over the past three quarters, and with disinflation coming into play, expect another weak showing for business in the upcoming quarter.
Moreover, in its fourth-quarter earnings call, company CEO Christopher Kempczinski commented on the decrease in units per transaction, while customers opted for lower-priced items on the menu. Hence, McDonald’s growth may not be as sustainable as many think. Meanwhile, MCD stock trades at over 8-times forward sales estimates, roughly 7.8% higher than its five-year average.
Like McDonald’s, Nike (NKE) boasts a leadership position in its sector, operating a moat-worthy business. However, the geopolitical and economic challenges over the past year have significantly weighed on its operating results. Moreover, its stock price is divorced from fundamentals, especially considering the challenging outlook ahead.
Nike was in the news for all the wrong reasons over the years, as logistics issues compounded issues arising from China’s strict lockdown policies. Consequently, its operating results have slowed considerably compared to the sector averages.
Revenue growth for the year is at around 6%, roughly 44% lower than the sector average. Moreover, its EBITDA growth is negative, (-8%), while the sector average is 3.2%. Perhaps Nike’s most sordid operating metric is its levered free cash flow growth at a negative 85%. Despite its uninspiring numbers, NKE stock trades at over 69-times trailing twelve-month cash flow numbers. That’s expensive, particularly in this market.
Meta Platforms (META)
Meta Platforms (META) is one of the leading tech companies globally, best known for its ubiquitous social media platforms Facebook and Instagram. However, despite the popularity of its platforms, its stock has been trending negatively over the past three years.
Concerns over its maturing social media businesses had the company investing billions in advancing its metaverse endeavors, which are unlikely to bear fruit for the foreseeable future. Meanwhile, its cash balance dropped by $17.7 billion last year, ending at $47 billion, while the company maintains a debt load of $9.9 billion.
Operating costs are up more than 23% in the fourth quarter, and with the weakening economy, Meta will continue to struggle to cut costs and grow sales. However, the company’s horrible operating performance is unlikely to stop the company from investing 20% of its 2023 spending into its Reality Labs segment. Therefore, I expect Meta to continue eroding shareholder value as it buckles under the pressures exerted by the current macroeconomic environment and its self-inflicted wounds.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.