The Crowded Trade In Big Blue Chips: Save Your Cash, Better Values Coming

|
Includes: CLX, ED, HCN, INTC, JNJ, KO, MMM, NVS, PFE, PG, TROW, UTX, WFC
by: Ted Waller

Summary

Large, safe, blue chip stocks receive extra attention when markets are volatile and weak.

The crowded trade in these stocks means they are not timely purchases.

Alternatives to buying safe blue chips near record highs are available.

Crowded Trade: A security or investment theme that has attracted an unusually large number of participants.

Participating in a crowded trade is usually not a good idea. However, large numbers of investors participate in them by definition. Many buyers and few sellers for a security is a guarantee of a high price.

The most crowded trade in equities today

Where is the most crowded trade today, and are you a part of it? One of the most popular buys today is in large, safe blue chips. Investors have been scared into these stocks by rapid drops in all major market averages and even bigger drops in sectors like oil, materials, and manufacturing. The voice of doom and gloom in the media is getting louder. Advisors recommend that everyone stay fully invested, so the pull towards safety is very strong.

Here is the current status for some well-known blues:

12 mo high

2/19/16

% off high

Clorox (NYSE:CLX)

132.19

128.74

-2.61

Con Ed (NYSE:ED)

73.90

70.80

-4.19

Johnson & Johnson (NYSE:JNJ)

105.49

104.20

-1.22

Coca Cola (NYSE:KO)

43.91

43.52

-0.89

3M (NYSE:MMM)

170.50

156.58

-8.16

Proctor & Gamble (NYSE:PG)

86.30

81.38

-5.70

Click to enlarge

No doubt these are among the safest companies available. But conditions are constantly changing, and companies like these should have better price points in the future. Past price behavior gives us an indication of what can happen to even the safest companies from time to time. The table below shows the price variations for three recent time periods. In the first two periods every company had losses from their highs several times greater than where they sit now.

High

Low

% drop

Window

JNJ

1998-2000

53

35

-34%

2 mo below 40

2007-2009

72

47

-35%

4 mo below 55

2014-2016

105

90

-14%

MMM

1998-2000

51

39

-24%

1 mo below 40

2007-2009

93

45

-52%

6 mo below 60

2014-2016

170

138

-19%

PG

1998-2000

59

27

-54%

15 mo below 35

2007-2009

73

44

-40%

6 mo below 55

2014-2016

86

69

-20%

KO

1998-2000

34

23

-32%

2 mo below 26

2007-2009

32

19

-41%

5 mo below 24

2014-2016

44

38

-14%

CLX

1998-2000

66

29

-56%

27 mo below 45

2007-2009

68

46

-32%

3 mo below 55

2014-2016

132

107

-19%

*flash crash lows of 8/24/15 not included

Click to enlarge

The window column shows that the declines were not quixotic and lasted long enough for most investors to catch them.

It is possible that we have seen market lows for now and stocks like these only will go up from here, but it is much more likely that investors will have an opportunity to get these stocks at significantly lower prices. Some of the factors that might contribute to this are:

  1. Economic and market conditions that have caused the volatility of the past six months are still present. They show no signs of abating, and some are getting worse.
  2. Once buyers interested in the crowded safety trade have made their purchases, buying and prices will slack off.
  3. If market capitulation occurs, there will be indiscriminate selling across the board. We got a taste of this in August and February.
  4. The importance of these companies in indexed funds helped them on the way up, and will hurt them on the way down. See this eye-opening article by Owen Williams on the subject. Stocks like these were far from immune from recent market-wide selloffs.

Action choices

If you already own shares in these or similar blue chips that are sitting near their highs, hold on to them. Most pay good dividends and the long term downside is relatively limited. Regarding new purchases, there are several action choices to consider.

1. Set a target buy price and stick to it. The table below contains possible buy prices based on past behavior. They are suggestions only, starting points for discussion. Target 1 prices might indicate the trade is becoming less crowded. Target 2 is a more aggressive cost saver associated with stronger support levels.

12 mo high

12 mo low

Recent

Target 1

Target 2

CLX

132.19

107.00

128.74

125

110

ED

73.90

56.86

71.30

66

62

JNJ

105.49

90.00

104.20

100

95

KO

43.91

38.00

43.52

40

38

MMM

170.50

138.00

156.58

150

140

PG

86.30

69.00

81.38

75

70

Click to enlarge

Some investors prefer to be fully invested to maximize dividend income, but a waiting strategy can easily bring in more money. Money saved with a lower purchase price is greater than forgone dividends. As an example, Consolidated Edison, the highest yielder, has an annual payout of $2.68. If ED takes nine months to get to the Target 1 price of $66 the investor loses $201 from three quarterly dividends, but gains $530 from buying at $66 instead of $71.30.

2. Sell put options at a target buy price. Many people don't or can't sell options, but this is an ideal situation for those that do. It will give you a nice option profit and allow you to buy shares at a lower price. As an example, the JNJ August 100 put can be sold for $350. If 100 shares are put to you, your savings are:

$350 put sale proceeds, plus

$400 stock price savings ($104 today - $100 purchase price)

$750 profit vs. buying today

If you don't get the stock because it doesn't reach the strike price, there are always other stocks that can take its place as sectors come in and out of favor. It's not financially healthy to fall too much in love with one company. Thinking that one company is essential at any cost leads to poor decisions.

3. Look at out of favor stocks that have already declined in price. There are many high quality blue chips that have not participated in the very crowded safety trade and/or have damaged stock prices for various reasons. These stocks will go down more in a bear market, but in the longer term it is unlikely capital will be lost. Some candidates to consider are:

12 mo high

12 mo low

recent

% off high

Intel (NASDAQ:INTC)

36

25

29

-20%

Novartis (NYSE:NVS)

107

72

74

-31%

Pfizer (NYSE:PFE)

36

28

29

-20%

T. Rowe Price (NASDAQ:TROW)

84

34

68

-19%

United Tech. (NYSE:UTX)

124

85

88

-29%

Wells Fargo (NYSE:WFC)

59

45

48

-19%

Welltower (NYSE:HCN)

80

53

57

-29%

Click to enlarge

Summing Up

Investors can avoid handicapping themselves by not participating in the crowded trade on high priced blue chips. We need any edge we can find, and this is an easy one. Even the diehard buy-and-holder who says, "It really doesn't matter what the price is, I just collect the dividend," won't do herself any favors by ignoring it. It's easy to buy safe stocks in volatile times, but there are responsible alternatives.

Many readers will think of other companies that can be added to the examples in this article. Bearish readers may have target prices more extreme than those suggested here. Even if prices continue lower after purchasing at the targets, an investor will have saved a significant amount of money and can be confident with these companies that he will profit in the long term.

Disclosure: I am/we are long PFE, HCN, NVS, TROW, WFC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.