In the financial world, not all that glitters is gold. Take, for instance, the realm of blue-chip stocks, those large, reliable, and profit-generating juggernauts that usually radiate nothing but success. These businesses have built an empire with popular consumer products and a killer track record. However, the three doomed blue-chip stocks discussed in the piece hold exceptions to that notion. These high-risk blue-chip stocks are showing cracks in their facades.
Although the three names may come as a surprise, even these seemingly unshakable firms can evolve into unstable blue-chip stocks. That said, let’s delve into the whys and hows of this unexpected turn of events.
Doomed Blue-Chip Stocks To Avoid: Royal Bank of Canada (RY)
In a move that’s stirring up financial waves, the Royal Bank of Canada (NYSE:RY) is looking to scoop up HSBC Canada for a staggering $13.5 billion. That move would mark the biggest domestic bank acquisition in the bank’s history. However, the timing of this ambitious undertaking, amidst towering debt levels in the Canadian financial system, is puzzling.
Furthermore, there’s a major concern that Royal Bank could plunge into negative earnings territory in the event of a recession. It has just 0.5% of its loan book allocated as an allowance for its loan losses. Moreover, the vulnerability of Canadian banks, particularly RBC, to the mortgage market’s fluctuating dynamics is significantly higher than its US counterparts due to differing default insurance standards and home prices.
The recent spike in Canada’s mortgage rates and the tumbling of home prices amplify the risks. With more borrowers going underwater, the default threat among variable-rate borrowers is ominously looming, signaling more trouble for RBC.
3M (MMM)
3M (NYSE:MMM) is trapped in a legal quagmire, posing major questions to its investor base. The conglomerate is wrestling with two major lawsuits, one tied to earplugs supplied to the U.S. military and another linked to its use of forever chemicals. A resolution has been reached for the latter with up to a whopping $12.5 billion payout, but the earplug lawsuit remains uncertain.
On top of that, its business is struggling under the weight of the current challenging economic conditions. Moreover, the idea of cutting dividends to alleviate the pressure on earnings might seem like an obvious viable fix. However, 3M’s Dividend King status complicates the situation as a cut would likely sour investor sentiment. 3M can ill afford such a move with the stock down by more than 15% year-to-date. Until there’s clarity on these matters, MMM is a blue-chip stock you want to sell.
Netflix (NFLX)
In the realm of tech giants, Netflix (NASDAQ:NFLX) has proven to be a dazzling star this year, with its value surging by nearly 50% in this year’s bullish market. However, the bearish arguments surrounding the stock are more compelling, which suggests the bullish optimism may be slightly overblown. The recent crackdown on password sharing and the rollout of an ad-supported subscription could be promising over the long term. Nevertheless, one cannot help but wonder whether those potential revenue and profitability boosts are already priced-in.
Netflix could continue to flourish if its earnings performances rise in tandem with forecasts. However, the shark-infested waters of rival streaming platforms and increasing competition will likely yield less-than-anticipated results. Therefore, the company’s future gains rely heavily on a continued turnaround instead of a steady growth trend.
On the date of publication, Muslim Farooque 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.
