In a bear market, not all blue-chip stocks live up to their name. Investors need to identify the blue-chip stocks to avoid in their long-term portfolio. Otherwise, those stocks could lead to bigger losses as the selling pressure intensifies.
Companies that misjudged the severity of inflation, and what customers wanted, and failed to lighten inventory amid a sudden decline in demand have the highest investment risks. For example, customers may have a medium to very high income but are living paycheck to paycheck.
They will prioritize paying their mortgage, covering sheltering costs, and having enough income for food first. They may sell their luxury goods and cut spending on discretionary items. Retailers like Walmart, and Home Depot are at risk of profit margins shrinking.
E-commerce firms are not immune to the slowing economy. Amazon may sell goods at the same price as the physical stores. Consumers who are shopping for food may pick up comparable items at stores. That would hurt Amazon’s sales volumes in 2022.
These blue-chip stocks have only fair quality scores.
In the chart to the right, courtesy of stock rover, a quantitative stock scoring site, few stocks are good quality. Home Depot scores an 83/100 for now. This will worsen as the housing demand crisis worsens in 2022.
With high priced ticket item category, people will delay purchases of new Ford and General Motors vehicles. Instead of visiting a Disney theme park, they will travel locally.
| AMZN | Amazon | $114.54 |
| DIS | Walt Disney | $97.85 |
| F | Ford | $12.02 |
| GM | General Motors | $34.65 |
| HD | Home Deport | $282.8 |
| JPM | JPMorgan Chase | $117.27 |
| WMT | Walmart | $124.53 |
Amazon.com (AMZN)
Amazon.com (NASDAQ:AMZN) said that customer demand remained strong in the first quarter. The company benefited from continued strength in Prime purchases and levels of usage. Although it did not experience softness, the company is not ignoring the current inflationary headwinds ahead.
Amazon is bracing for households operating on a tighter budget. It needs to have a product mix that appeals to the everyday consumer. Amazon’s director of investor relations, Dave Fildes, said that it sees around $4 billion in pressure due to higher inflationary pressures and lower productivity. It also expects some fixed cost deleveraging that stretches into the second quarter.
Amazon has a few advantages over the competition. Its transportation shipping rates are very competitive. By operating an internal shipping system, it can keep realize savings. It has lower costs compared to that of external carriers.
The company needs to increase employee productivity levels. It ended the first quarter with 1.6 million employees. This is down from its peak of 1.7 million in the period. Due to lower business activity, Amazon needed to lower its headcount. Investors should wait for the company to report higher productivity before considering AMZN stock.
Walt Disney (DIS)
Walt Disney (NYSE:DIS) is stuck in a downtrend that began in November 2021. The bearish stock market is hurting DIS stock. The firm cannot afford weak revenue from its blockbuster titles.
On June 17, Disney and Pixar’s Lightyear earned $5.2 million in previews. Still, despite competition from Jurassic World Domination and Maverick, the studio should expect revenue of at least $100 million.
In the television segment, Disney’s executive management shakeup should concern investors. The company abruptly fired executive Peter Rice. It replaced him with Dana Walden. Walden will oversee multiple units. This includes ABC Entertainment, ABC News, Freeform, FX, and Disney Television Studios.
Peter Rice worked in the industry for more than three decades. The former executive quietly cultivated important relationships with directors and producers. He received only positive feedback from Disney in the past.
Unfortunately, shareholders need to worry about CEO Bob Chapek. The executive is busy fighting with California and Florida. Disney needs a leader that focuses on developing content that appeals to its audience. For example, customers do not need to pay much for Disney Plus to view Marvel and Star Wars content.
Ford Motor (F)
Ford Motor (NYSE:F) traded at around $24.00 before losing nearly half its value. Thanks to its ownership in Rivian Automotive (NASDAQ:RIVN), EV investors piled on F stock. When RIVN stock fell from $100, investors sold Ford shares, too.
Investors ignored the supply chain disruption hurting Ford’s sales volume. At first, investors thought the company could benefit by selling at retail prices without relying on discounts and incentives. They also treated Ford’s 166% year-on-year increase in Mustang Mach-E sales as bullish.
On June 14, 2022, Ford recalled around 49,000 Mach-Es due to battery safety issues. The recall includes vehicles built between May 27, 2020, and May 24, 2022, built in its Mexico plant. Normally, its strategy of building EVs in low-cost countries would harm quality. This time, the company may issue a fix with software. Still, Ford cannot afford to issue major safety recalls that damage the brand name.
General Motors (GM)
Similar to Ford stock, General Motors (NYSE:GM) shares are on a downtrend. The automobile maker needs to share rising inflationary costs with customers. GMC raised the price of its Hummer EV Pickup and SUV by $6,250.
GM needs to address a contradiction with its EV strategy. The high price, limited appeal, and high gas requirement forced GM to end production of the gas-powered Hummer after the financial crisis. To increase attention to its EV line-up, it brought back an EV version of the Hummer.
As one of the most expensive EVs on the market, GM further increased the price. This may have no impact on demand from rich customers. Yet if the cost of commodity parts, logistics, and technology rises further, that may change.
On June 6, 2022, GM dropped the price of the 2023 Chevy Bolt EUV by $6,300. The base model will cost below $30,000. It is targeting customers who are shunning high gas prices.
GM’s contradictory strategy may confuse all customers. Until it has a coherent EV plan, investors should avoid GM stock.
Home Depot (HD)
After peaking at over $400, Home Depot (NYSE:HD) fell as shareholders braced for the impact of higher interest rates hurting home renovations.
Housing demand will continue its slowdown in 2022. Mortgage financing costs will destroy home sales. Existing homeowners face higher monthly payments. They will have lower disposable income. This will cut their home renovation budgets.
Lowe’s (NYSE:LOW), like Home Depot, will face similar headwinds from the slowing home demand. Home Depot has limited options available in differentiating its offerings to grow its market share. Both firms will need to adjust for a loss in demand from professional projects.
HD stock investors will need to wait out the interest rate tightening cycle. Expect the Federal Reserve to raise interest rates next month and again in September. After that, the consumer price index should start falling. Once inflation rates slow, the central bank will stop raising rates. Mortgage rates will stop rising after that.
Macroeconomic conditions for housing are poor now. HD stock will under-perform.
JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) will benefit from higher interest rates. It earns more as it raises lending rates. Despite that tailwind, JPM stock is on a downtrend. The bear market is hurting private equity and asset managers. Investors are selling JPMorgan in sympathy to asset managers losing value and investor inflow.
In May 2022, only 31% of investors voted in favor of giving CEO Jamie Dimon a $52.6 million stock option award. The loss in confidence will limit JPMorgan’s ability to attract talent. Unable to give new hires a generous stock compensation package, JPMorgan needs to rely on current staff to grow.
To compete with emerging fintech globally, JPMorgan is pushing into international consumer banking. This aggressive strategy is not risk-free. Its digital bank could lose $1 billion. The bank’s international consumer business head, Sanoke Viswanathan, said that the unit would break even by 2027 or as late as 2028.
Investors will need to discount the bank further if international bank health worsens. The executive might push its break-even target beyond 2028.
Walmart (WMT)
Walmart (NYSE:WMT) increased its inventory after the pandemic in anticipation of strong consumer demand. But in March, demand shrank considerably. Inflation forced Walmart’s customers to prioritize their spending on necessities like food. The company’s warning on high inventory levels sent WMT stock from $150 to $120 on May 17, 2022.
Walmart’s inventory increased by 32% YOY. It added apparel, electronics, and many other categories of goods that consumers did not want. Investors should expect weak gross margins soon. It will need to mark down prices as it refreshes its inventory with back-to-school items. Later this year, Walmart needs to prepare for the holiday gift-giving season.
Internationally, Walmart is managing the high inflation levels in Chile. In China, inflation is at its lowest. However, China remains mostly in lockdown. Its slow progress in lifting lockdowns will hurt Walmart’s international growth.
Wall Street analysts are optimistic about WMT stock. All analysts rate the stock as a buy or a hold, according to Tipranks. Until Walmart’s inv9IJentories fall, the skeptical investor should ignore the average $157 price target.
On the date of publication, Chris Lau did not have (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.