One of the main draws of investing in a big company is security, so companies with a flimsy growth story or questionable financials make for blue-chip stocks to avoid. While a lot of the blue-chips out there come with somewhat of a too big to fail caveat, there are plenty that will be a drag on your portfolio in the medium term.
Aside from rocky financials and poor growth prospects, which sector the company is in can also have a big impact on whether a blue-chip stock is worthwhile. At present, there are some spaces, like financials, that have storm clouds brewing. That doesn’t necessarily mean every big company operating in the space is a blue-chip stock to sell, but it does mean quality is essential for success.
Sometimes the business is solid, but market enthusiasm has tipped it into the bucket of overvalued blue-chip stocks. Inflation has made it harder to live up to sky-high valuations. Every dollar of profit in 10 years time is worth a lot less in today’s money thanks to rising costs. So a higher-than-average valuation can become a burden even for a strong company. Here are three blue-chip stocks to sell before their valuations to come tumbling back down to earth.
Verizon (VZ)
Remember all the hype that surrounded the 5G rollout? Verizon (NYSE:VZ) and the rest of its telecom peers are beneficiaries of that, but it’s now time to move on. The group’s business offers cell phone service and hardware to retail and business customers, a relatively secure place to sit. After all, even though budgets are stretched, most people still find room for a cell phone.
5G is an important catalyst for the industry, and one Verizon has jumped on. The group spent billions on building out its 5G presence, but the rewards are still somewhat elusive. It’s hard work to attract and then hang on to customers in the telecom space because there’s very little setting you apart from the competition. That means Verizon is likely to get caught in a price war with its peers, which would wreak havoc on margins after all that 5G spending.
Verizon is not going under anytime soon, but the group’s prospects look thin on the ground for now. With more debt on the books than is ideal and a virtually non-existent competitive moat, the group could be in for a rocky road ahead.
Franklin Resources (BEN)
With a dividend yield upwards of 4%, it might surprise you to find investment firm Franklin Resources (NYSE:BEN) on a list of blue-chip stocks to sell. However, the company’s bread and butter is offering mutual funds to investors, and stock picking is starting to fall out of favour as investors look for safer, cheaper options to protect their wealth against rising inflation.
When the market is performing, asset managers like Franklin Resources are able to justify their client fees by pointing to a stellar performance. When things turn sour that’s a little harder to reason. Plus, an economic downturn tends to make investors skittish, with many pulling their money out of riskier asset classes in search of something with less volatility.
Importantly, the group’s second quarter results were better than expected, but longer-term the group looks likely to be stuck in the mud thanks to shifting investor preferences.
Clorox (CLX)
Clorox (NYSE:CLX) became a household name during the pandemic and, although we all knew the exceptional demand wouldn’t last forever, the group’s fall back down to earth has been disappointing all the same. Inflationary pressure throughout the supply chain together with lackluster demand has left Clorox management peddling harder to claw back some of its profitability.
A year after its fall from grace, Clorox is still struggling to get margins back to where they were. There’s been some slow and steady progress in the right direction, but ultimately margins in the mid-40% are still a long way off.
Plus, consumer goods isn’t an ideal place to be with inflation raging and the public nervously snapping their wallets shut. Picking up a stock with its best days well behind it in that environment is a risk that’s probably not worth taking. Brand power is important, and Clorox has plenty of that. However we’re seeing consumers start to shift toward generic brands in an effort to stretch their budgets further. That adds an additional obstacle for Clorox in an already challenging turnaround story.
On the date of publication, Marie Brodbeck did not hold (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.