In general, when markets trend lower, it makes sense to invest in blue-chip stocks. They tend to have a low beta and also provide regular cash flows through dividends. Yet, not all blue chips are created equal. Based on macroeconomic or company-specific factors, there are some you want to buy and some blue-chip stocks to sell.
For example, blue-chip retailer Target (NYSE:TGT) sits 45% below its 52-week high, weighed down by inflationary pressures and margin compression. And pharmaceutical giant Pfizer (NYSE:PFE) is 30% below its high on concerns of a slowdown in growth predominately due to lower Covid-19 vaccine sales.
So, investors need to carry out due diligence even with blue chips. Today’s list of blue-chip stocks to sell in October contains popular names that are likely to correct or correct even further.
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PepsiCo (NASDAQ:PEP) stock is up 11% over the past year, bucking the broader bear market, and it throws off a healthy 2.7% dividend yield. However, shares look expensive with a forward price-earnings ratio of 22.8.
PepsiCo is likely to see decelerating growth or margin pressure in the coming quarters. The company is reportedly considering cost-cutting measures, including layoffs and buyouts for some employees over 55. Shares have fallen around 3% since the story broke. A confirmation from the company could trigger panic selling.
It’s also worth noting that Pepsi has finally stopped production in Russia. The country happens to be the company’s second-largest international market after Mexico. The implication of the production halt on growth remains to be seen.
Amid these uncertainties, PEP stock’s valuation looks stretched and shares are likely to correct in the near term. Having said that, a 15% to 20% correction from current levels to the $130s would be a good time to consider some bullish exposure.
Costco Wholesale (COST)
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In the long term, Costco Wholesale (NASDAQ:COST) is possibly the best bet among retail stocks. The company has built a strong omnichannel sales presence. Rising member fees are likely to support cash flow, and comparable-store sales have been rising. However, I remain cautious in the near term.
COST stock has been resilient in the face of the bear market, up 6% over the past year. Yet, with a forward price-earnings ratio of 33.9, shares look relatively expensive amid mounting economic uncertainties including the possibility of a recession in the U.S. in 2023. The impact of aggressive interest rate hikes on consumer spending remains to be seen. I also expect Costco to face margin pressure in a slowdown or recession scenario.
Those who wish to go long COST stock are likely to get a much better entry point after shares correct.
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Doctor copper has continued to weaken due to two factors. First and foremost, the U.S. dollar has been gaining strength. Second, global economic uncertainty is likely to translate into lower copper demand. In this scenario, I would avoid miner Freeport-McMoRan (NYSE:FCX).
FCX stock is 15.6% lower over the past year, slightly better than the S&P 500’s 17.7% decline. However, in the event of a global recession, FCX stock is likely to correct further. While its forward price-earnings ratio of 13.1 is well below the broader market index’s forward P/E of 17.9, keep in mind that, in general, cyclical stocks tend to have a lower price-earnings ratio.
In terms of business fundamentals, Freeport-McMoRan has utilized the copper bull market to strengthen its balance sheet. At the end of the second quarter, the company had just $1.6 billion in net debt. While management expects copper sales to increase in 2023, this may be offset by lower prices.
In short, this doesn’t look like the ideal time to jump into a copper play. Those who wait for a further correction will likely be rewarded for their patience.
Occidental Petroleum (OXY)
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Occidental Petroleum (NYSE:OXY) is on my list of blue-chip stocks to sell because it has gotten much too far ahead of itself, with shares nearly doubling in the past year. Much of this investor enthusiasm has been due to the fact that Warren Buffett continues to buy up shares despite falling oil prices. Lower oil prices will translate into EBITDA margin compression on a relative basis in the coming quarters.
Now, I don’t expect a big plunge in oil prices in the coming quarters even if we enter a recession. However, based on how far OXY stock has run over the past 12 months, there appears to be much more downside risk than upside potential at the current level, especially if oil prices continue to trend lower.
I’m not the only one who thinks this. Analysts from Citigroup and JPMorgan both have “neutral” ratings on the stock due to what they see as capped upside over the next few months.
That said, I like the fact that Occidental is focused on deleveraging. In the next few years, the company is likely to have an investment-grade balance sheet. This will provide greater headroom for dividend growth and share repurchases.
Yet, while Buffett may have pockets deep enough to ride out a big correction in the stock, individual investors may not feel the same way.
On the date of publication, Faisal Humayun 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.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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