There are no hard and fast rules for what constitutes a blue-chip stock. You just know them when you see them. They tend to be large, stable, profitable companies with well-known consumer products that have a long track-record of success. Investors tend to view blue-chips stocks as safe havens for when times get tough. But if that’s the case, why have the three companies below become blue-chip stocks to avoid? Big investors are selling off their shares in these stalwarts.
If the so-called smart money is running for the exit, does that mean you should too? Let’s take a closer look to find out if you should also be shedding these blue-chip stocks investors are selling.
Consumer products giant Colgate-Palmolive (NYSE:CL) had quite a number of billionaire investors heading for the door in the first quarter. According to Whale Wisdom, there was an 84% increase in the number of institutional investors who decided this was on the list of blue-chip stocks to avoid, and closed out their positions in the toothpaste maker over the first three months of the year. Hedge funds sold out at a rate 38% greater than the previous quarter.
Among them was Joel Greenblatt, who is arguably best known for his Magic Formula investing strategy. His Gotham Asset Management actually began dumping Colgate shares in the fourth quarter and ended his position during the next period. Jefferies Group (NYSE:JEF) also sold out despite having just initiated its position in the fourth quarter.
Colgate-Palmolive owns a global portfolio of best-selling consumer products including Colgate toothpaste, Palmolive dish soap, SpeedStick deodorant, Murphy oil, Irish Spring soap and Ajax household cleaner. Yet profits have been hurt by inflation, high commodity costs and unfavorable currency exchange rates. About two-thirds of its revenue comes from international markets. Shares are down almost 3% this year compared to a near-13% increase in the S&P 500.
Chevron (NYSE:CVX) is apparently both loved and hated by big money investors. Ray Dalio’s Bridgewater Associates recently established a $56 million position in the integrated oil and gas giant. It also remains one of Warren Buffett’s biggest holdings at Berkshire Hathaway (NYSE:BRK-A. NYSE:BRK-B).
Yet there has been a 25% increase in institutions dumping the stock and even Buffett just trimmed his holdings by 20%. Tiger Management’s Julian Robertson, on the other hand, completely closed out his position in the first quarter.
Certainly the oil leader is having a tough time this year as oil prices tumble. West Texas Intermediate crude oil is down to $70 a barrel. That’s a 9% drop from three months ago and 36% below where it was a year ago. As Chevron’s revenue and profit will rise and fall based on oil prices, the stock is down 10% in 2023 as a result.
Yet Chevron is in superior financial shape with a strong balance sheet. CEO Mike Wirth says Chevron can still buy back billions of dollars worth of stock even if oil drops to $50 a barrel. And it recently announced it was buying PDC Energy (NYSE:PDC) for $7.6 billion in an all-stock deal. PDC’s assets in Colorado’s DJ Basin are complementary to Chevron’s own and will increase its proved oil equivalent reserves by 10% for less than $7 per barrel. The acquisition will also add $1 billion to Chevron’s annual free cash flow.
But, those upsides haven’t been enough for big investors. Chevron is one of those blue-chip stocks to avoid which insiders are selling.
Chipmaker Intel (Nasdaq:INTC) remains a bellwether tech stock despite the numerous troubles it has encountered over the past decade. Indeed, its stock has returned only 39% over the last 10 years at a time when the S&P 500 climbed 171%. The tech-laden Nasdaq 100 was even better, surging more than 400%.
Although some 216 institutional investors closed out their positions in the first quarter, according to Whale Wisdom, others like Tweedy Browne dramatically lowered their exposure to the chip stock.
Tweedy Browne, of course, was the company that used to execute trades for Benjamin Graham and Buffett. It tends to follow their tenets of value investing that calls for buying companies at a discount to their intrinsic value to increase one’s margin of safety.
Many may see that margin narrowing considerably for Intel. The chipmaker is undertaking a major restructuring to eliminate vast inefficiencies and cut costs by up to $10 billion. To challenge Taiwan Semiconductor Manufacturing Company (NYSE:TSM), Intel will be building a new, world-class foundry business while separating its existing manufacturing operations and chip design business. Each will report financials independently.
It’s a whole new way of doing business for Intel, but won’t be a profitable one for a while. By courting new third party customers, the chipmaker hopes to eventually turn that around. That may be too long and too uncertain for investors who may see TSM, Advanced Micro Devices (NYSE:AMD) and GlobalFoundries (Nasdaq:GFS) as competition that is just too far ahead for Intel to catch up.
On the date of publication, Rich Duprey held a LONG position in CL and CVX stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.