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Battered Blue Chips: Value Stocks or Traps?

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Welcome to Episode #81 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

The recent stock market correction is impacting stocks across the entire gamut of the stock market, from large cap to small caps. That even includes the golden blue-chip type stocks.

The reason some stocks are considered blue chips is because they are considered safe, large cap stocks that aren’t supposed to be volatile in a portfolio. They are also usually owned by a large percentage of investors.

Some might even consider them boring.

But even the blue chips can run into rocky periods and, for some, that’s happening right now.

Some blue chips started to tumble in 2016 and 2017 and the recent correction only added to the losses.

Is it time to buy them?

Definition of a Value Trap

Remember, not all stocks that sell off are values. Some companies may have value fundamentals including low P/E, P/B, P/S ratios. Some may even have value PEG ratios, which means a PEG under 1.0.

But that’s not enough. A true value stock will also have earnings growth.

The value traps will have all the value fundamentals but earnings estimates will be falling or will be negative year-over-year.

The key, then, is to look at the full year earnings estimates.

Are These 5 Battered Blue Chips Value Stocks or Traps?

Tracey took a look at 5 blue chip stocks that have sold off the last few years to see if there could be a buying opportunity there.

1.      General Electric (GE - Free Report) continues to sink. It recently hit a new multi-year low. The shares are trading with a forward P/E of 15 now. You’d think these were a bargain, right? After all, it IS GE. But is it a true value?

2.     Newell Brands (NWL - Free Report) is a mess. After two quarters of disappointing sales, and now a management crisis, the shares are down 14% year-to-date. 2018 earnings are expected to be unchanged versus 2017 despite the largest corporate tax cuts in history. But shares are trading at just 9x. Should you be buying Newell right now?

3.     Under Armour (UAA - Free Report) plunged in 2017 but this year it has recovered and is now up 11% year-to-date. Sounds like things could be turning around. But shares now trade with a forward P/E of 68. Are investors too bullish on this athletic apparel and shoe retailer or is there a true earnings turnaround happening here?

4.     Chipotle Mexican Grill, Inc. (CMG - Free Report) saw its shares sink over 14% in 2018 after it reported yet another disappointing quarter. Customer traffic has not rebounded and same store sales remain anemic for a chain that was once the darling of the restaurant industry. The appointment of a former Taco Bell executive to be CEO, however, has boosted the shares off the recent lows. Should value investors be buying with a forward P/E of 30?

5.     J.C. Penney Company, Inc. (JCP - Free Report) was left for dead by investors in 2017. Department stores aren’t going to make it, right? But shares are up 1% year-to-date. With a forward P/E of 20, are earnings finally going in the right direction for this out-of-favor retailer?

What else should you know about telling the difference between value stocks and value traps?

Tune into this week’s podcast to find out.

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