As most investors know, blue-chip stock (the name probably comes from poker) is the stock of well-established companies.
Because these are multi-billion dollar corporations, mostly with a long history of paying rich dividends, conventional wisdom would suggest they are rock solid investments.
So, why does Jim Cramer’s TheStreet suggest that 3 traditional blue chips are “struggling” and “at risk?” The reasons are as varied as the companies behind the stocks themselves. It’s also a cautionary tale to investors that “blue chip” stocks are at play in the same market as all other stocks and therefore subject to the same ups and downs.
Blue Chips To Avoid
Here are the details behind TheStreet’s take on 3 of Wall Street’s mostly legendary names.
Solid dividends and a history of superior capital allocation may mask underlying problems, according to TheStreet. Net margins have fallen more than 10% over the past decade and sat at 6% in 2015. In addition, return on equity dropped from double digits to under 10% currently.
As a growth stock, Exxon hasn’t done well. With shares trading at 21.6 times P/E (11.4 times is the 5 year average), the outlook isn’t positive.
The answer to what has happened to Wal-Mart can be found in one word – Amazon AMZN. The rise of e-commerce, despite Wal-Mart’s attempts to compete with its own Web presence, has had a negative impact on Sam Walton’s brick-and-mortar megastores.
Wal-Mart’s present value is $217 billion. Amazon sits at $283 billion. Worse yet, Wal-Mart’s expected EPS growth (per year) over the next five years is a miserable 0.04%.
No less than iconic investor, Warren Buffett, has said owning IBM could be a mistake.
YTD, IBM has shown gains of 9.01%. Unfortunately, for the past 3 straight years the stock has delivered negative returns.
IT services are changing. Not many believe Big Blue has changed enough. Dividends have been solid but revenues have tanked, as has operating income growth. Free cash flow has declined as has the number of employees (following massive layoffs).
Blue Chips To Buy
According to 24/7 Wall Street, the world of blue chips also has value – if you know where to look.
Crown provides infrastructure to wireless carriers and currently has 40,000 towers and 15,000 small cell nodes in operation. All that is supported by 16,000 miles of fiber.
Wall Street analysts view Crown as the cleanest play on U.S. mobile infrastructure, citing the company’s low risk capital return strategy, upside optionality and investment grade balance sheet. The fact the company is structured as a REIT means dividends may contain return of principal.
GM is inexpensive and that is a big draw. Major players like hedge funds and mutual funds like this and are heavily invested in the company, which they consider to be undervalued.
Trading at 5.4 times estimated 2016 earnings reinforces that notion. Sales in China have benefited the company since that country is now the world’s largest auto market.
With potential trouble over ignition switches still looming, GM should be considered a long-term investment according to 24/7.
As one of the higher yielding domestic stocks in the energy sector, Occidental functions internationally in oil and gas exploration and production. The company has operations in the U.S., Middle East and Latin America.
According to Merrill Lynch, the company continues to deliver capital expenditure cuts with an expected total of $3 billion in cuts this year alone. Occidental’s balance sheet is sold and the company has paid quarterly cash dividends continuously since 1975.
Verizon is simply one of the top telecommunications companies in the world. The sale of wireline operations in California, Florida and Texas to Frontier Communications was seen by Wall Street as a huge cash boost to Verizon.
Recently there have been rumors of a bid for Yahoo. While it’s just a rumor, The Wall Street Journal named Verizon a “top suitor” for the company recently.