Every time I write a column suggesting that some of the market's leading lights are overvalued I take a certain amount of flak for doing so. It seems that nearly all the blue-chip stocks have devoted fans who take a certain degree of umbrage when I have the temerity to suggest they are a bit pricey given market conditions and the corporate outlook.
Let me clear that if you have owned shares of Coca-Cola (KO) for decades, I am not suggesting that you sell them. I am suggesting that if have new money to put to work you should avoid them for now. I also think that if you bought a particular blue-chip stock with less them a decade holding period in mind or have a low pain threshold, it might be a good time to sell.
I have spent a lot of time doing research over the past year, and I have reached a definitive conclusion. The vast majority of the time, investors should not be buying the large market capitalization dividend stocks. This is especially true today, given the weak economy and sluggish growth prospects for most of these giant companies. Instead, we should all emulate Warren Buffett and Charlie Munger and the way they buy blue chips.
Most of the time they sit on their backsides and hoard cash. When we get a dreadful market, take all that money and buy lots of the high-yielding giant corporations, with no intention of ever selling a share. A careful study of the big positions at Berkshire Hathaway BRK.A BRK.B and The Daily Journal shows that this is exactly what they have done over the years. To say it has worked out for them would be an understatement.
With that in mind, let's look at a few other blue chip stocks that should be avoided. The three to five-year growth estimates for Wells Fargo (WFC) are pretty low right now, at less than 2% on average per year, but there is a good chance they are too high. Wells is going to get hit hard by the account opening and cross-selling scandal and it will lose customers over it. The stock is down 15% so far this year, but I think we have a lot further to go as politicians are going to hammer away at the stock.
For the record, I think Wells got a bum deal, as it did a decent job of cleaning up the mess. Knowing what I know about the big banks' sales culture, I suspect it was far too late by the time the C-suite heard about the problems, as it would have been squelched at the regional level for as long as possible. Regardless of what I think, the bank is going to take a huge hit to its reputation and it is going to hurt earnings for an extended period. If it keeps falling, I will eventually be a buyer, but for now I think the stock is best avoided.
Campbell's Soup (CPB) is one of my guilty pleasures. One of my favorite lunches is either Chicken with Rice or Beef Noodle soup, with a peanut butter sandwich. I will continue to buy the sodium-laden soup when my wife and doctor are not looking, but I will pass on the stock at these levels. The company will be lucky to grow by 4% year and the shares trade at 29x earnings right now. Campbell's has a great collection of brands and products, but the price is simply too high right now given the growth prospects in a weak economy.
In the interest of upsetting as many income-seeking investors as possible, let me include a utility to my "don't buy these large-cap stocks" list. I have made a lot of money over the years buying utilities below book value in atrocious markets. I do not believe I have ever lost a nickel in a regulated utility stock, because I have never paid over book for one. I have a very hard time seeing how investors can expect to make money buying shares of Edison International (EIX) right now at 2x book value and 27x earnings. If the always-optimistic and highly accurate analysts are right, the company will grow at a little over 2% annually for the next several years.
Buying blue-chip dividend-paying stocks in a bear market is a brilliant strategy and has helped grow some large fortunes over the years. This is not a bear market, and most of these stocks are way too expensive to be smart buys.