As the bear market rages on, many investors have turned to blue-chip stocks to find safe harbor. Yet, while many blue-chips could add stability and safety to your portfolio (making them stocks to buy), there are plenty of such companies that are best-considered stocks to sell.
This is mostly due to valuation concerns. Prior to this year, scores of “dividend aristocrat” blue-chips surged higher, as low interest rates made these high-quality income stocks more appealing to investors. This resulted in several of these stocks to surge to valuations that appear to be potentially unsustainable. That’s because the Federal Reserve remains intent on raising interest rates, leading to the possibility that interest rates may remain at levels not seen in over a decade.
Along with multiple compression, there are other factors such as deteriorating fundamentals, that could take some blue-chip stocks lower.
These seven blue-chips stocks to sell aren’t necessarily headed to the graveyard. That said, for those looking to avoid future frustrating and underwhelming returns, it may pay to skip out on these stocks right now.
| CLX | Clorox | $136.25 |
| ED | Consolidated Edison | $84.87 |
| KO | Coca-Cola | $55.96 |
| MMM | 3M | $116.81 |
| MSFT | Microsoft | $242.12 |
| SHW | Sherwin Williams | $207.82 |
| WMT | Walmart | $136.80 |
Clorox (CLX)
Starting out our list of blue-chip stocks to sell is Clorox (NYSE:CLX). This company may be down more than 40% from the lofty price levels it reached during 2020. However, the company’s substantially lower stock price fails to make this venerable consumer staples stock a bargain. At current prices, shares trade for around 32.8-times estimated earnings for the current fiscal year (ending June 2023).
That means CLX stock trades at a substantial premium to peers such as Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL), which trade for 21.8-times and 18.2-times earnings, respectively.
Yes, sell-side consensus calls for a greater level of earnings growth for CLX than for either PG or UL. However, per analysts at Evercore ISI, various competitive challenges could lead Clorox to fall short of expectations. Disappointing results could potentially send CLX down to a valuation more in line with comparable names. This makes it one of the blue-chip stocks to sell in my books.
Consolidated Edison (ED)
Consolidated Edison (NYSE:ED), best known to its customers as “Con Ed,” is the largest utility company in New York City. Con Ed provides electric and gas to millions of homes and businesses throughout America’s largest metropolitan area.
With a deep economic moat, and in a recession-resistant business, ED stock (like other utilities stocks) looked very appealing to investors earlier this year when the stock market downturn first took shape. From January to September, shares moved higher, even as stocks broadly trended lower. Unfortunately, this resiliency has come to an end.
The specter of continued interest rate hikes has put pressure on utilities stocks, including ED stock. Accordingly, despite this pullback, ConEd could keep sliding. With a forward earnings multiple of 18.5-times, Con Ed trades at a premium to peers like Duke Energy (NYSE:DUK), and Exelon (NASDAQ:EXC), which each trade for around 16-times earnings.
Coca-Cola (KO)
Coca-Cola (NYSE:KO) is the quintessential blue-chip stock. Shares have also long been a Warren Buffett favorite, with Buffett’s Berkshire Hathaway (NYSE:BRK.B) holding it in its portfolio for nearly 35 years.
With this in mind, it may seem odd at first to consider KO one of the blue-chip stocks to sell. That said, while the soft drink giant has long provided investors steady returns through price appreciation and dividends, future returns for KO stock could be far more underwhelming.
KO’s valuation (22.5-times earnings) could come under more pressure, as the company is set to deliver sluggish revenue (2.9%) and earnings growth (3.7%) next year. The end of near-zero interest rates also means Coca-Cola’s 3.2% dividend no longer seems as high-yield as it once did. Down modestly (7.1%) year-to-date, the market could continue to bid down the stock, until it reaches a less-aggressive valuation.
3M (MMM)
Trading for just 11-times earnings, and yielding 5.27%, why is 3M (NYSE:MMM) a blue-chip to sell? Indeed, the industrial conglomerate’s shares may be far cheaper than the stocks we’ve discussed so far, and have already taken a big plunge year-to-date.
That said, I think a further sell-off may lie ahead.
Why? Well, macro factors have played a role in the decline of MMM stock in 2022, but the main factor has been the company’s legal troubles. 3M is fighting litigation related to both its past sale of military earplugs, as well as its past manufacture of PFAS chemicals.
This litigation could continue to drag on MMM’s returns. It may also result in a dividend cut, making the stock a potential yield trap. While attempting to lighten an estimated $33 billion in liabilities (per Bloomberg Law), the company’s game plan to lessen the blow has failed to achieve success thus far.
Microsoft (MSFT)
Down around 30% since the start of 2022, is now a good time to load up on tech blue-chip Microsoft (NASDAQ:MSFT)? Not so fast, at least, according to research firm Hedgeye. Earlier this month, Hedgeye’s Ami Joseph laid out his bear case for the software and cloud computing giant.
In a nutshell, Joseph argues that MSFT stock is pricey when taking into account future growth. Furthermore, the analyst believes that competition from Amazon’s (NASDAQ:AMZN) AWS platform will result in growth for Microsoft’s Azure cloud platform to fall short of Wall Street estimates.
After sliding following the release of this bear case, MSFT has started to bounce back in recent trading days. However, that doesn’t necessarily mean Joseph has made the wrong call. If Microsoft’s upcoming earnings release (on Oct. 25) falls short of expectations, another big pullback for the stock may be in store.
Sherwin-Williams (SHW)
With the 2021 housing boom possibly morphing into a 2023 housing bust, sentiment for Sherwin-Williams (NYSE:SHW) has already shifted. With investors moving from bulls to bears, shares have already dropped around 40% since January.
The paint giant appears reasonably priced relative to next year’s earnings projections ($10.29 per share). Based on this forecast, SHW stock currently trades for less than 20-times earnings, at the lower end of its historic earnings multiple range. However, it’s very possible the company fails to hit these estimates.
As a Seeking Alpha commentator recently argued, management may have to again cut guidance, due to weakness in not only the U.S. market, but also overseas in Europe and China. If demand for its products continues to weaken, Sherwin-Williams may have a ways to go before truly bottoming out. Keep this in mind, if you were thinking of “buying the dip.”
Walmart (WMT)
After tanking last May, alongside other retailer peers, Walmart (NYSE:WMT) shares have made a partial recovery in recent months. That said, while it may seem as if the big box giant’s shares have already bottomed-out, it’s possible the stock pulls back instead of moves higher from here.
Analyst forecasts call for single-digit sales and earnings growth. This makes WMT stock appear pricey, at around 23-times earnings. In today’s rising rate environment, it may prove difficult for its multiple to expand. Also, it’s important to note that as recently as 2017, this stock traded at an earnings multiple in the mid-teens.
With growth slowing down, despite its big push into e-commerce, a move back to such a valuation may be justified. Even if Walmart doesn’t fall back to its past earnings multiple, a partial compression of its valuation could still result in a double-digit drop for shares.
On the date of publication, Thomas Niel 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.