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By Lawrence Meyers
| October 2016
There was once good reason to trust in blue-chip names, but these blue chips are so wildly overvalued that owning them simply isn't safe.
One of the problems with the current market is that the words “blue chips” still retain the same meaning despite a market in which that idea is now somewhat obsolete.
Yes, blue chips are companies that are solid, and will likely be around forever, but the term also connotes “safety” — and that couldn’t be further from the truth these days.
The reason is that many of these stocks are not merely overvalued, but insanely overvalued. In some cases, they even have systemic problems that nobody pays attention to because they are “blue chips.”
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Mike Mozart via Flickr
Procter & Gamble Co. (PG) is exactly the kind of stock that my forthcoming stock advisory newsletter, The Liberty Portfolio, would never hold.
Why? Revenue has been stagnant and declining, net earnings has gone nowhere for years and the company spends free cash flow buying back stock that is vastly overpriced.
With a $236 billion market cap, it trades at about 24x earnings on no earnings growth. This is a perfect example of “insanely overpriced,” and you can get twice the 3% yield in preferred stocks with less risk.
Wal-Mart Stores, Inc. (WMT) could well become an anachronism in the era of Amazon.com, Inc. (AMZN).
Of course, with almost $15 billion in net income, that’s not likely to occur for some time.
The problem with WMT stock is the same thing that plagues PG stock. The business is fine but it isn’t growing. Investors pay for growth, and if they aren’t getting growth, then you better be giving them a competitive dividend.
WMT trades at 15x earnings on zero growth … which might be reasonable were the dividend about twice the current 2.9%.
Son of Groucho via Flickr
The Coca-Cola Co. (KO) has been struggling against a secular headwind that isn’t going away: the health craze.
Sugary drinks are out. Healthy beverages are way in and will remain in. That’s a trend that isn’t going to reverse, because the obesity epidemic is now a public concern.
The problem is Coke’s management has no vision for incorporating this trend into its DNA. It has made steps, but that’s not enough. KO trades over 24x earnings, again for no growth and a tiny 3.4% yield.
Dennis van Zuijlekom via Flickr
International Business Machines Corp. (IBM) is another classic example of a company that was once at the top of the blue chips universe, only for it to become an increasingly irrelevant operation.
Revenue fell $11 billion (12%) in fiscal year 2015. Operating income is falling. Net income fell over 20% in just two years. IBM stock is down nearly 20% over the past five years, and when you add the dividend (now at 3.6%) back in, those investors are still underwater. Even at 12x earnings, it remains expensive.
Kraft Heinz Co. (KHC) has had a complicated history as of late, essentially being formed by multiple mergers involving Warren Buffett.
The problem with these venerable brands is the same problem that is plaguing KO. They largely sell junk food, and Americans are fleeing that stuff in droves. It’s difficult to build hundred-year-old brands, only to have the entire population shift its choices and be able to adjust in a timely manner.
Yes, KHC stock is also wildly overpriced, and yes, that’s yet another reason to dump it.
I’m actually suggesting McDonald’s Corporation (MCD) as a sell for now, but as opposed to never buying it back, I actually think you could get back in at lower prices.
The difference between fast food and junk food, while the same from a nutritional standpoint, is that many people all over the world buy it as a full meal because of its price point.
MCD finally got the turnaround right, and has rejiggered itself in fine manner.
I would sell here, but in the next correction or crash, try to get buy back in the low $90’s.
Costco Wholesale Corporation. (COST) needs to go, but solely on a valuation basis for now.
There’s no question that COST is an outstanding operation, heading in the right direction, with real net income growth. Despite being an operation with a lot of overhead and capital expenses, it still regularly generates about $2 billion in free cash flow, which is mostly drives back into the business.
However, at almost 30x earnings on about 15% earnings growth, it is just too pricey … for now.
Jim Larrison via Flickr
Time Warner Inc. (TWX) has always been a stock that I feel was pointless to own when you could own a more diversified operation with better properties, such as the venerable Walt Disney Co. (DIS).
Somehow, despite owning HBO, Warner Bros. Studios and Turner Broadcasting — with some terrific franchises and TV channels — TWX isn’t growing its revenue.
It’s also an expensive operation to run, and the free cash flow only translates to a 2% yield … and a company trading at 16x earnings. It’s just not worth it.
Mike Knell via Flickr
eBay Inc. (EBAY) was once a pioneer in the world of the internet and the first iteration of the “sharing economy,” acting as the middleman for a flea market.
However, it evolved into a home for collectors and the gray market, and when Amazon started offering used goods, its days were numbered.
Having spun off PayPal Holdings Inc. (PYPL), which made good money, it is now a company lacking direction, with erratic and declining net income, trading at an undeserved 20x multiple.
Brian Reading via Wikipedia
Dow Chemical Co. (DOW) is still an industrial powerhouse, but I fear it is sinking toward becoming another IBM.
It is in the midst of an important transitional period in its history. As a legacy chemical company, it has a solid slate of business and revenue, but it needs to transform into a company for the future.
It’s in fine shape financially, but with a $60 billion market cap and erratic growth, there’s too much risk here for a 3.5% yield.
This article is from Lawrence Meyers of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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