There Is No Such Thing as a Crash-Proof Stock
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Over on MarketWatch an article entitled "Three crash-proof blue-chip stocks" was published on Monday, in which the author put forth three big-name stocks that he believed could weather a pullback better than the rest. The three stocks put forth were Exxon Mobil (NYSE: XOM), Amgen (NASDAQ: AMGN), and, believe it or not, Apple (NASDAQ: AAPL).
But there is no such thing as a crash-proof stock, and for a long-term investor it doesn't make sense to look for one. A stock falling in price during a pullback is an opportunity, not a crisis, and trying to time your selling in order to avoid fluctuations in price is a recipe for disaster. Not only is the strategy a bad one, but the stocks suggested aren't exactly low-risk.
The worst of the bunch
Exxon Mobil is an enormous company, with nearly half a trillion dollars of revenue in 2012. This size, however, makes it difficult for the company to grow at any significant rate, and in fact revenue and earnings have been on the decline recently. After a small drop in revenue in 2012 the second quarter of 2013 saw a year-over-year decline of 16.4% while net income was more than cut in half.
I think there is this inherent assumption that Exxon is so big that it is also safe, but price is a significant factor in determining the risk. Big oil stocks like Exxon are often bought for the dividend, and Exxon offers the lowest dividend compared to its peers. A projected yield of 2.78% is well below the 3.27% yield of Chevron (NYSE: CVX), for example. And while Exxon has grown its dividend at an annualized rate of 9.3% over the past decade Chevron has trounced this with 10.5% annual growth. While both companies have fairly low payout ratios Exxon has a greater potential for earnings declines thanks to its larger size. Chevron saw EPS decline by 24% in Q2, far smaller than Exxon's 55% drop.
These are the reasons why Chevron is part of my Ultimate Dividend Growth Portfolio while Exxon is not. There's simply no reason to choose Exxon over Chevron at current prices, and in the event of a major pullback I'd expect Exxon to be hit the hardest to bring its dividend in line with its peers.
Biotech is safe?
Amgen is a leading biotechnology medicine company with a market capitalization topping $80 billion. As the MarketWatch article stated, Amgen does have $22 billion in cash, but the article fails to mention the $24 billion in debt on which the company pays $1 billion per year in interest. Interest is not exactly my favorite use of cash as an investor, and that interest eats away nearly 19% of the company's operating profits.
The stock, having risen considerably since the beginning of 2012, is not a very good value at all. The stock trades at nearly 20 times last year's earnings, a steep price to pay for an $80 billion company. Analysts are expecting just 8.8% annual earnings growth, putting the PEG ratio well above 2. Because of all of this Amgen will likely be one of the worst hit in the event of a pullback. The stock isn't outrageously priced, but it's not cheap, and I severely doubt that it is "crash-proof." If anything a crash would be the best time to pick up shares on the cheap, because right now the stock isn't a very good deal.
A fuzzy future
Apple is difficult to value because its future profitability is unclear. In fiscal 2012 Apple recorded $44.15 per share in earnings. Couple that with about $140 per share of net cash and the adjusted P/E ratio sits at just about 7.5. The problem is that earnings have been declining. The most recently reported quarter saw an EPS decline of nearly 20% year-over-year, and it's difficult to predict when and at what level this will stabilize.
Apple may well be the most crash-proof stock of these three simply because of its giant cash cushion, and in a no-growth or slow-growth scenario the stock is a steal. But this is not a guarantee, and as the iPhone continues to lose market share while the iPad faces inexpensive competition, margins will likely get squeezed. A low-cost iPhone which is rumored to be planned will result in lower margins and may cannibalize normal iPhone sales, and the lack of new groundbreaking products makes future sources of profits unclear.
At $700 per share the stock seemed cheap, and then it proceeded to fall below $400 per share for a time. The same crash-proof argument could have been made at $700 as is being made now, and it clearly wasn't true then and it likely isn't true now. There is a floor created by the cash, but earnings could continue to fall indefinitely, creating a significant risk.
The bottom line
There is no such thing as a crash-proof stock, and buying expensive stocks like Exxon and Amgen certainly isn't the way to achieve any sort of safety. Apple's future is so fuzzy in terms of profitability that calling it a defensive stock is a little crazy. The best way to deal with a crash is to use it as an opportunity to buy stocks at a discount, not to worry about short-term declines in your holdings.
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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple and Chevron. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!