3 Stocks That Aren’t as Safe as You Think

When the market goes into a tailspin like the one that we've been in, it's generally a great time to load up on high-quality stocks that are household names.

However, that's not necessarily always the case. Sometimes crises can shine a spotlight on weaknesses investors may have been overlooking when times were good. As Warren Buffett once said, "Only when the tide goes out do you discover who's been swimming naked." 

At the same time, while coronavirus has punished some well-known names, it has also spurred investors to chase stocks they think will benefit from the stay-at-home economy.  The truth is, some household names have deserved their punishment, while newly crowned "winners" of the coronavirus crisis might have a rude awakening down the line if results don't live up to the hype.

In any case, just because a stock is a housheold name doesn't necessarily mean it's a great investment all the time, and the following three stocks might not live up to their reputations.   

Image source: Getty Images.

ExxonMobil

Even though shares of ExxonMobil (XOM -2.78%) have been cut in half since the year began, investors may want to think twice about rushing out to buy shares. Exxon has long been thought of as the biggest and safest oil major out there, with global operations in upstream drilling, both offshore and onshore in U.S. shale, along with downstream operations in refining and chemicals.

While Exxon may be safer than some other independent drillers now flirting with bankruptcy, it doesn't necessarily mean all is well with Exxon. Even before the coronavirus crisis hit, Exxon wasn't exactly doing well, with net income down some 30% in 2019 versus the prior year, as oil prices stagnated and refining and chemicals earnings plunged.

In fact, when you take a look at Exxon's five-year results, things don't look particularly enticing.

Data source: ExxonMobil annual report. Chart by author.

Exxon's current dividend payout is $3.48 per share, higher than last year's EPS and barely below the average $3.72 Exxon averaged over the past five years. Still, that average was before the recent implosion of oil prices and the breakout of a brutal Saudi Arabia-Russia oil price war, prompting the rating agencies to lower Exxon's credit rating from AA+ to AA.

Though Exxon only trades about 11 times last year's earnings and just under 10 times its average earnings over the past five years, and therefore seems incredibly cheap, remember that those are not crazy valuations for a company that is stagnant or declining, and one that may need to potentially cut its payout in the future to fund capex. Exxon has been a Dividend Aristocrat, having raised its payout every year for 37 years, but if it breaks that streak this year, the stock could lose more of its luster. And with the electric vehicle wave having the potential to seriously cut into oil demand looking out 10 to 20 years, Exxon may not be as bulletproof as some think.

Netflix

As you can see in the disclosures below, I still own shares of Netflix (NFLX -0.63%), but I've reduced my stake recently. It isn't because Netflix isn't a great business run by great managers. Rather, it's a combination of the fact that the stock has done so well amid the crisis, bringing its valuation up to a level that may prove difficult from here.

Netflix's stock is actually up about 10.4% in 2020, trouncing the market. That's brought its valuation up to 90 times earnings, which is expensive, but the company's free cash flow is actually negative $3.3 billion. The company expects to have another negative free cash flow year in 2020 to the tune of about $2.5 billion, but that was before coronavirus hit. While coronavirus could lead to a short-term boost in subscriptions, it has also halted a lot of Netflix's productions. That may save money in the near term but will have to be made up later.  Likely, Netflix will continue to invest in production through the use of debt, which has increased to $14.8 billion as of the end of last year – though only $9.8 billion net debt when subtracting Netflix's cash.   

Funding growth through debt isn't necessarily a bad strategy, but one needs to be sure of the payoff down the road. On that front, Netflix has a deluge of competition coming into the streaming world, with many competitors priced lower than Netflix's monthly subscription. Furthermore, while international subscriptions have been strong, Netflix saw U.S. subscriptions stagnate last year, before all of the competitors even got into the market.

Netflix is no doubt a great company, but with rising debt, incoming competition, and an already-slowing North American market that may be headed for recession, I'm not sure Netflix's results will justify its higher price, even if the near-term results could be aided by recent stay-at-home orders.

Zoom Video

The caution around stock market darling Zoom Video Communications (ZM 1.57%) is very similar to that for Netflix: An otherwise great company that investors believe will benefit from the stay-at-home economy, yet with a stock price that has surged to an unjustifiably high level. In fact, Zoom now trades at 67 times sales -- not earnings. Sales.

That's bubble territory, even for a software-as-a-service company. While everyone that you know is likely talking about having Zoom meetings with their friends and relatives, a lot of the new surge in demand is on Zoom's free tier. Moreover, Zoom has to make room for all of that free traffic, and management recently admitted the recent usage boom may eat into its gross margins.  

Though Zoom has become somewhat synonymous with the group-video experience, it also isn't without competition from Cisco (CSCO -0.50%), Logmeln (LOGM), and the other cloud companies that could very well come up with their own in-house versions at some point, as Tencent (TCEHY 2.19%) has in China. 

Like Netflix, Zoom is a great company that should benefit from the recent stay-at-home orders. However, is that a reason for the stock to have surged 123% this year? Probably not.

A household name until it isn't

All three of these household names have had a lot going for them; however, ExxonMobil is facing severe near-term headwinds and long-term concerns over demand for oil. Investors need to hope for oil prices to bounce back -- something Exxon doesn't control.

Meanwhile, Netflix and Zoom are a bit different. Both are in growth industries and may benefit in the near term from recent quarantines. However, investors have bid both companies up to valuations where they're no longer safe.

Expensive growth stocks are vulnerable to severe corrections if numbers disappoint bigger and bigger expectations. If that happens with Netflix or Zoom and the stocks fall back to earth, investors may want to consider taking a position. But until then, they're a bit too hot to handle.