Many investors turn to the S&P 500 for a diversified portfolio of profitable companies. This index does most of the work for you and gives you exposure to some of the top companies.
However, this index contains 500 stocks and a few of them are bound to generate bad returns for long-term investors. Stocks get filtered out of the index if they no longer meet the eligibility requirements. However, some stocks stay in the index even if they aren’t generating meaningful returns for shareholders.
Investors may want to sell these three S&P 500 stocks as they are likely to underperform the market.
Target (TGT)
Target (NYSE:TGT) doesn’t have a high price-to-earnings (P/E) ratio as it only sits at 18.60 for now. However, the company’s financial trends suggest shares are overvalued, especially after a 32% run higher since the latest earnings report.
In that earnings report, Target reported a 5% year-over-year revenue decline and a 36% year-over-year jump in adjusted EPS. Target projects revenue will decline again in the fourth quarter by mid-single digits. The adjusted EPS range is $1.90 to $2.60 compared to an adjusted EPS of $1.89 during the same period last year. The midpoint implies a 19% year-over-year contraction.
Target also had sluggish results in 2022 that featured low-single-digit revenue gains and big EPS losses.
The retailer recently launched a low-cost brand which investors can interpret as a sign of declining sales. It is no secret that consumers feel pinched and are tightening their budgets. Target’s willingness to venture into the market of $1 items at a time of declining revenue indicates a weakened business model.
Investors should note that other retailers like Walmart (NYSE:WMT) have posted solid quarters featuring revenue and earnings growth.
United Postal Service (UPS)
United Postal Service (NYSE:UPS) is typically a stable stock that doesn’t appreciate much but offers a high dividend. People will always buy products online and need them shipped to their locations. UPS has served well in this role for over 100 years and is a mainstay in the supply chain.
While UPS serves a vital function for the global economy, that doesn’t mean its stock is fairly valued. Shares currently trade at a 19 P/E ratio. However, there are a few concerns that suggest the stock can lag behind the S&P 500 and lose value.
The first concern is the stock’s 3.17 price-to-earnings-to-growth (PEG) ratio. A PEG ratio above 1.00 typically indicates a stock is overvalued. Another issue to keep in mind is UPS’ declining revenue and earnings. UPS generated $24.9 billion in Q4 FY23 revenue, which is down from $27 billion in the same period last year. Adjusted diluted EPS came in at $2.47 compared to $3.62 last year.
These aren’t good numbers and the company’s dividend hike suggests more financial pain is ahead. UPS hiked its quarterly dividend from $1.62 to $1.63 per share. It’s an obligatory, bare minimum dividend hike that does not suggest a lot of room for any upside.
Verizon (VZ)
Verizon (NYSE:VZ) is not a good stock for long-term investors. The 6.50% dividend yield certainly looks enticing but a five-year loss of 29% warrants caution. Shares are flat over the past year and that’s only because of a surprising 29% rally since October.
The telecom giant is swimming in $128.5 billion in unsecured debt and reported a slight year-over-year decline in consolidated operating revenue. The company has an unimpressive 0.64 quick ratio which means it has more current liabilities than current assets.
Verizon is a shrinking company that is trying to preserve its market share. Low-quality financial growth has caught up with the company in the long run. That’s why Verizon has dropped by 29% over the past five years. Although Verizon offers a high yield, dividend growth has come to a crawl. The company has a tendency to raise its quarterly dividend per share by 1.25 cents per year. The big rally to close out 2023 leaves the stock vulnerable to a correction.
On the date of publication, Marc Guberti 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.
