The bears have been calling for a recession since mid-2021, citing the unnatural shift post-pandemic in monetary policy and the lack of production to support the stimulus-induced demand. If you go by the book, much of that has already come true. We have had two quarters of negative GDP growth and high inflation worldwide due to a shortage of tangible goods. The bulls use this as evidence that the worst is behind us. Most economists, however, believe that smart investors should always be on the lookout for stocks to sell.
While a recession is not likely in 2023, the probability of it happening spikes to 68% by April 2024. The Federal Reserve has noted in its latest meeting that although they have paused for now, they are still considering two more rate hikes later this year. Even if that’s all bark and no bite, the economy still needs to digest the record increase in interest rates in the last one and a half years.
Of course, that does not mean you should completely ignore the opportunities in the market. Many stocks still offer great value and upside potential with little downside risk. However, staying cautious of businesses in recession-prone sectors is critical when headwinds start brewing.
Here are three stocks to sell:
Nordstrom (NYSE:JWN) has been losing sales and market share for years, and its debt load is unsustainable. The company has no competitive edge or growth potential and faces fierce competition from online and specialty retailers.
Nordstrom’s revenue fell by 10.87% year-over-year to $3.18 billion in its latest reported quarter. The company’s losses widened to $205 million, or $1.28 per share, compared to a loss of $20 million, or $0.11 per share, in the same quarter last year. The net margin here is also negative in the negatives at -6.44%, which isn’t a promising metric for a “luxury” brand. Nordstrom’s main selling point is its customer service and shopping experience, but these are not enough to justify its premium prices and lower margins. The company has tried to differentiate itself by offering services like personal styling, curbside pickup and local market strategy, but these have not been enough to attract or retain customers.
Nordstrom’s debt is another major concern for me. The company has some $4.5 billion in debt compared to just $581 million in cash. With so much cash burn, it is heavily reliant on debt to finance its operations and should headwinds get tougher, JWN will be in a very dangerous position.
Thus, it is one of the top stocks to sell in my book. Hedge funds, insiders and Wall Street analysts unanimously agree that there is little opportunity here. It has had 8 “Hold” and 5 “Sell” ratings with zero “Buy” ratings.
Wynn Resorts (WYNN)
Wynn Resorts (NASDAQ:WYNN) might’ve been a “wynner” so far this year, but it is time to dial back on this stock before it reverses course. Indeed, a lot of people would disagree with me here as we are amidst a travel boom, but I’d reiterate that this list is primarily for recession-prone stocks. Wynn is one pick that stands out among travel stocks as it still has big caveats to account for regardless of the recession catalyst.
Wynn Resorts has $13.9 billion in total debt and a large chunk of that is floating rate. As Todd Shriber points out, the excessive leverage here can lead to this stock being “vulnerable in a recession.” One of my major concerns here is that Wynn is still not profitable (on a TTM basis) despite the recent travel boom unlike many of its peers. The quarterly profits it did manage are a hair above 0 at $32 million in Q4 and $12 million in Q1. With $1.4 billion in sales last quarter, it needs more profitability to offset the debt caveat. The 41 forward price-to-earnings multiple also means it’s richly priced in this range.
Regarding stocks to sell, the energy industry is one that is often hit the hardest during a recession. ConocoPhillips (NYSE:COP) is one you should dump right now due to its rich valuation and bad financial metrics ahead. The price of natural gas has plunged and crude oil is also not in a good position right now. The company’s revenue has plunged by nearly 20% YoY in the last reported quarter and profits declined by almost 50% YoY. This is yet to be reflected in the share price as COP trades at very elevated levels with a forward P/E ratio of 11 times.
Looking further, analysts expect sales to continue shrinking through 2025, and 2025 EPS is expected to be lower than what it is now at $8.95 vs $9.63 now. With abysmal growth potential and a rich valuation, even GuruFocus, a very bullish analysis tool, sets the fair price at $90 by 2026!
On the date of publication, Omor Ibne Ehsan 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.