The summer months provided a brief respite from the ugliness of 2022’s bear market, but there is reason to believe things could get worse from here.
U.S. consumer confidence increased slightly following the passage of the Inflation Reduction Act and amid falling gasoline prices. Last week, the index moved above the 50-point mark for the first time since May. But — and this is a big “but” — the poll also showed Americans are tightening their budgets.
In addition to reduced consumer demand, many investors and market pundits are pointing to the housing sector as a key concern. The news here is mixed as well. Logan Mohtashami, lead analyst at HousingWire, said that while the situation does not classify as a bubble, he does see “unhealthy home price growth.”
Finally, we have the Federal Reserve’s aggressive rate hikes in an effort to tame runaway inflation. The market was clearly hoping to hear that the slightly subdued July inflation numbers would prompt the central bank to change course and stop raising rates. Fed Chair Jerome Powell’s speech at Jackson Hole, Wyo., last week put an end to that fantasy and led to a 1,000-point-plus single-day drop in the Dow Jones Industrial Average.
Whether we’re currently in a recession or headed for one, here are a few stocks to sell before things get worse.
|Zoom Video Communications
Peloton Interactive (PTON)
Peloton Interactive (NASDAQ:PTON) is a pandemic success story turned cautionary tale. As Covid-19 health restrictions shuttered gyms across the nation, fitness enthusiasts suddenly had nowhere to go. Peloton, with its popular at-home exercise equipment and subscription platform, suddenly became the go-to for many.
As a result, PTON stock catapulted from below $20 in March 2020 to an all-time high above $170 in January 2021. But as life began to return to normal, shares plunged. Today, the stock trades at around $10 per share following a 94% decline.
The current economic climate isn’t likely to make people eager to shell out thousands of dollars for stationary bikes and treadmills. For Peloton’s fiscal year ended June 30, the company reported a loss of $2.8 billion, up from a $189 million loss in the prior year.
Demand is unlikely to return in the near future, making PTON one of the top stocks to sell before things get worse.
Teladoc Health (TDOC)
Like Peloton, Teladoc Health (NYSE:TDOC) was a pandemic darling that came crashing back down to Earth. As demand for its telehealth services exploded, shares rocketed 267% from $84 at the start of 2020 to a high above $300 in February 2021. Today, the stock sits 90% off that high.
In theory, the pandemic demand spike that sped up the firm’s development and telemedicine offerings should have helped the company approach profitability. However, that hasn’t been the case. For the first half of the year, the company reported a loss of nearly $9.8 billion despite an 18% year-over-year jump in revenue. Teladoc is likely to report a loss for the full year even as revenue continues to grow at a double-digit pace.
Until Wall Street starts to turn its focus back to pre-profit growth stocks, investors should steer clear.
Scotts Miracle-Gro (SMG)
Bargain hunters may be eyeing Scotts Miracle-Gro (NYSE:SMG), which is down more than 60% from its 52-week high. It also offers a 66-cent quarterly dividend for a 3.5% forward annual yield, which likely makes it attractive to income investors.
However, a look at the consumer lawn and garden products firm’s most recent earnings report should make it clear that this is one of the stocks to sell, not buy.
Quarterly sales declined 26% from a year ago to $1.19 billion, including a 14% drop in the consumer segment. Adjusted earnings of $1.98 per share were down sharply from $3.98 per share last year. And management lowered its full-year revenue forecast and now expects a sales decline of 8% to 9%.
Investors should heed the writing on the wall and take a pass on SMG stock until the company can reverse its fortunes.
Zoom Video Communications (ZM)
As the pandemic forced many people’s work and social lives online, Zoom Video Communications (NASDAQ:ZM) became the go-to video conferencing option. As a result, the stock catapulted from relative obscurity to a high well above $500 per share in the fall of 2020. Today, it trades around $81.
The company cited macroeconomic headwinds as the reason for a recent revenue miss and weak guidance. Quarterly revenue of $1.1 billion was up 8% year over year but fell just shy of Wall Street’s estimate of $1.12 billion. Although Zoom’s earnings per share of $1.05 beat analysts’ estimate of 93 cents per share, shares are down around 17% since the report was released one week ago.
The post-earnings sell-off likely has much to do with management’s revenue guidance for the current quarter. Forecasting $1.09 billion to $1.1 billion in sales, it missed analysts’ $1.15 billion estimate.
ZM stock is down 56% year to date and nothing in its recent quarterly results or outlook sparks hope of a turnaround. On the contrary, it is clearly one of the top stocks to sell.
Opendoor Technologies (OPEN)
The major players in the high-flying iBuying space — Opendoor Technologies (NASDAQ:OPEN), Zillow (NASDAQ:Z) and Redfin (NASDAQ:RDFN) — have seen their share prices decline sharply amid Covid-19-related uncertainty, rising interest rates and a cooling housing market. If a housing crash does occur, there will only be more pain ahead.
Opendoor may be the worst of the iBuyers, which leverage massive capital, scoop up tracts of housing and assert significant influence over the housing market. InvestorPlace’s Josh Enomoto characterizes Opendoor as “a disaster.” He notes that it not only fails to solve problems for homebuyers but actually introduces them via unfavorable mortgage rates.
The company posted a net loss of $54 million for the second quarter despite a 254% yer-over-year-increase in revenue to $4.2 billion That doesn’t seem very appealing to me and nor do its arguably shady business practices.
Carvana (NYSE:CVNA) continues to sell more used cars and grow revenue, which was up 16% year over year in the second quarter to $3.9 billion. Yet, the company posted a net loss of $439 million compared with a profit of $45 million a year ago.
Management admitted it misjudged demand amid rising interest rates and high inflation, which have hurt potential buyers’ ability to finance vehicles and demand for Carvana’s loans. Amid this backdrop, the company is looking to get costs under control. To that end, it laid off 12% of its workforce in May.
I see no reason for investors to reward Carvana with their capital at this point. It’s likely to be a tough road ahead for the online used-car dealer, which is why it’s on my list of stocks to sell.
Darden Restaurants (DRI)
Darden Restaurants (NYSE:DRI) is the parent company of Olive Garden, LongHorn Steakhouse and other dining chains. Based on its latest quarterly results, investors may be tempted to give the stock a look.
The company announced in June that it would be increasing its quarterly dividend and authorizing a new $1 billion share buyback program. This followed a 14.2% year-over-year jump in quarterly revenue to $2.6 billion, driven by an 11.7% blended same-restaurant sales increase.
But keep in mind that as economic conditions worsen, consumers are less likely to spend money eating out as they tighten their belts. That’s why many analysts like to caution investors against buying DRI stock when things get difficult.
Shares are down 17% year to date, slightly more than the S&P 500’s 15% decline. However, the stock could easily revisit its pandemic lows around $30 per share if the economy enters a recession.
On the date of publication, Alex Sirois 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.