Warning signs are rising for a couple handfuls of blue chip stocks, according to a study by Julian Emanuel, a strategist at BTIG. While consensus earnings estimates for 2019 have been sharply reduced for these stocks, they have failed to fall in response, positioning them to underperform the broader market in the coming year, per the market watcher. Companies whose shares are at high risk of posting below average returns include The Walt Disney Co. (DIS), Marathon Oil Corp.(MRO), Chevron Corp. (CVX), Texas Instruments Inc. (TXN), PepsiCo Inc. (PEP), Johnson Controls International PLPC (JCI), Honeywell International Inc. (HON), Phillips 66 (PSX), Colgate-Palmolive Co. (CL), ConocoPhillips (COP), DowDuPoint Inc. (DWDP) and Sherwin Williams Co. (SHW), according to Emanuel’s recent report, as outlined by Barron’s.
Warning Signs for 12 Blue Chips
- Steeper-than-average earnings revisions since September.
- High valuations relative to their growth outlook.
- Low short interest, a sign that the market is overlooking downside.
- High-risk list includes Walt Disney, Marathon, Chevron, Texas Instruments, PepsiCo, Johnson Controls, Honeywell, Phillips 66, Colgate, ConocoPhillips, DowDuPoint.
Source: Barron's, BTIG
Pace of Decline for EPS Estimates Stands Out
While 2019’s period of relative stability in the markets has been aided by signs of easing U.S.-China trade tensions and a more dovish Federal Reserve, many investors have been banking on strong corporate earnings growth to sustain the stock rally. Meanwhile, expectations on the Street for S&P 500 2019 EPS growth have become more bearish, now at $168.71, lower by 5.4% from when the index hit its peak in September, per the BTIG strategist. Some market watchers warn that estimates could sink even lower, resulting in flat growth for S&P 500 earnings this year.
“While it is customary for earnings estimates to decline for the full year ahead in 4Q, the pace of decline for 2019 does stand out,” wrote Emanuel in the note released on Sunday.
The BTIG strategist built a quantitative model which screened for stocks with below-average earnings revisions since September, and above average valuations relative to their growth. Emanuel wrote that this combination indicates that these stocks are too expensive at current levels. He also screened for stocks with relatively low short interest, suggesting that investors have not picked up on the downside. A total of 16 stocks in the S&P 500 met this criteria. Among them include industry leaders like Disney, Honeywell, and Chevron, all which could present a trap for investors seeking to “buy on the dip,” according to Emanuel.
Consumer Products Giant Poised to Tumble
Consumer products maker Colgate, which has seen its stock rise 9.5% YTD versus the broader S&P 500’s 10.5% return, could be poised for a major crash, as outlined by Market Realist. While investors have applauded improved organic sales in the latest quarter thanks to higher pricing, expected weakness for both top and bottom line numbers could take a bite out of shares. Much of the downside in earnings results can be attributed to currency volatility, challenges in China, heightened industry competition and cost headwinds. Analysts now expect the New York City-based company’s bottom line to post a double digit decline in the first quarter.
On the valuation front, Colgate stock trades at 23.3 times 2019 EPS forecasts, above peers such as Procter & Gamble (PG) and Kimberly-Clark (KMB), at 21.5 times and 17.7 times respectively. Meanwhile, Colgate is projected a 4.5% decrease in EPS and weak sales growth. It’s dividend yield is also less attractive than its rivals, at 2.5% versus P&G’s 2.9% yield and KMB’s 3.5% yield.
Given the recent bull rally since the start of the year, and the ever-increasing number of S&P 500 companies which have slashed 2019 earnings forecasts, it’s likely than many more stocks than these 12 mentioned above are likely to be vulnerable to a major downswing.