Recessions don’t necessarily spell doom for all equity holdings. As I’ve argued before, some companies, particularly those levered to secular industries, may buffer the storm. After all, everyone has to eat, even during a market downturn. That said, there are certainly investments that are the worst stocks to buy in a trade-war fueled crisis.
Of course, any company that depends on China to make ends meet represents a red flag. When the U.S.-China trade war first started, many political observers held hope that the two sides will negotiate a deal.
For one thing, Trump supposedly made his fortune through wheeling and dealing. Second, and more importantly, the world’s top two economies would incur severe fiscal pain with tit-for-tat tariffs. But with national pride and political reputations on the line, the two have instead escalated the conflict. And that set the tone for the worst stocks you must avoid.
Worse yet, this escalation shows no sign of abating. Just recently, China announced a fresh round of tariffs on $75 billion worth of U.S. goods. Another round of tariffs will occur at the beginning of next month.
Not surprisingly, the acrimonious announcement infuriated President Trump. Taking to Twitter (NYSE:TWTR), Trump promised new tariffs to take effect on October 1, impacting $250 billion worth of goods. Instead of the previous 25% tax rate, it will bump up to 30%. Logically, this has bolstered the negative argument for this crisis’ worst stocks.
Just as you would with positive-leaning investments, you shouldn’t play games with these worst stocks. Avoid them for now while the trade war rages on.
Although consumer electronics giant Apple (NASDAQ:AAPL) is up big this year, it took a punishing blow last Friday. On that session, AAPL stock dropped nearly 5%. And with that move, shares suddenly don’t look so hot anymore. But technical damage isn’t the only reason why I think it’s one of the worst stocks to engage.
First, prior to this trade war escalation, sales of smartphones of all varieties slipped to multi-year lows. Of course, this is a major headwind for all competitors in the space. But for AAPL stock, the underlying company has been attempting to diversify its revenue allocation. So far, this effort has only netted modest results. Overall, Apple’s iPhone still represents the lion’s share of revenues, and that exposes the company to substantial China risks.
Second, with President Trump recently announcing his retaliatory tariffs, the narrative for AAPL stock has worsened. Plus, Trump “ordered” American companies — via Twitter, of course — to start making their products in the U.S. I don’t take this seriously. However, it does suggest a long trade war ahead of us, which is why AAPL is among the worst stocks to buy right now.
Shares of Tesla (NASDAQ:TSLA) have been all over the map this year. Throughout most of the first half, TSLA stock skidded off the rails, leaving a wake of disheartened stakeholders. But in July, the equity bounced back, giving embattled shareholders a quick burst of optimism.
Unfortunately, it was short lived. TSLA stock plummeted in late July, and the selloff continued throughout most of August. Last Friday, shares dropped 5%, reminding investors why this is one of the worst stocks of 2019.
I do believe that Tesla CEO Elon Musk is a genius. But I also know some contrarians are out there waiting to pull the trigger. So if I may offer some advice, I would stay away from TSLA stock during this heightened environment.
Here are two reasons why. First, while electric vehicles (EVs) represent innovative technologies, the infrastructure isn’t ready to support their mainstream integration. Second, China is the biggest automotive market in the world. Under such a bitter environment, Tesla really has no chance of penetrating this vital arena.
If Tesla is one of the worst stocks to hold against a coming recession, don’t expect much from the Tesla of China, more widely known as Nio (NYSE:NIO). On a year-to-date basis, NIO stock is down more than 52%.
But like with Tesla above, speculative contrarians are probably licking their lips. No matter what you think about the company or stock, Nio-branded cars are undoubtedly beautiful machines. Combined with their exposure to China’s massive automotive market, an economic recovery there would skyrocket NIO stock.
Still, I wouldn’t get too excited. First, China’s automotive sales plummeted to scary levels during the first half of this year. I don’t think those losses can just be patched up with some diplomacy. Second, the Chinese government has introduced policies that essentially scale back prior limitations against buying fossil-fueled cars.
As I argued previously, that takes away a huge incentive to buy EVs. Additionally, given this platform’s new and relatively unproven nature, I’m not too hot on NIO stock.
Without recession fears, iQiyi (NASDAQ:IQ) has an interesting narrative. As a Chinese content-streaming company, it naturally draws comparison to Netflix (NASDAQ:NFLX). On paper, iQiyi has 100 million subscribers, with the vast majority of them being paying customers. That in part has supported the bull case for IQ stock earlier this year.
But even within a recession, IQ stock has something to offer. As I mentioned in my recent story about Roku (NASDAQ:ROKU), companies that provide cheap entertainment are incredibly relevant during downturns. In both the Great Recession and Great Depression, the movie industry brought smiles and levity to dark circumstances.
But will this dynamic benefit IQ stock if we enter a recession? Admittedly, it might do just that. However, I noticed some problems with the iQiyi narrative. One of them is that revenue growth has recently flatlined, which doesn’t inspire confidence.
Moreover, China is a huge market for content piracy. Thus, if the Chinese want cheap entertainment, they can find it.
Under Armour (UA, UAA)
At the beginning of this month, I mentioned that Under Armour (NYSE:UA, NYSE:UAA) was one of the most shorted stocks. I really should have doubled down and mentioned that it was one of the worst stocks to consider, even as a contrarian. Between the publishing date of my article through August 23, UAA stock dropped 17%.
And if you look at the charts since late July, you can see a straight drop down for UAA stock. Of course, most folks will point to the sports apparel-maker’s mixed results for its fiscal second-quarter earnings report. At the time, the company pared expected per-share profitability loss, but missed slightly against revenue. However, Wall Street punished UAA stock for its downbeat guidance.
But what makes UAA among the worst stocks is its China risks. Let’s be blunt. In the U.S., the federal minimum wage is $7.25. Assuming 40-hour weeks, that translates to $1,257 a month. In China, the highest minimum wage is $358 per month.
That’s a 251% monthly differential that the trade war threatens. And if that goes, I don’t think UAA stock stands much of a chance.
Normally, I’d offer an established sports-apparel company like Adidas (OTCMKTS:ADDYY) as a counterweight to Under Armour. But with a possible recession around the corner, I’m very hesitant on ADDYY stock, along with category rival Nike (NYSE:NKE). Ultimately, this trade war doesn’t just impact the worst stocks in the U.S. or China; instead, it’s a global pressure point.
Not necessarily known for subtlety, the Germans laid it out as bluntly as they could: unless some miracle materializes, the country is headed toward recession. And with Germany being the most stable, robust economy of the European Union, that spells trouble for the entire region. In this circumstance, I don’t think people will gravitate toward outrageously priced premium-label sneakers. And that makes ADDYY stock a candidate for one of the worst stocks at this juncture.
I’ll freely admit that I’m no geopolitical expert. But if I’m interpreting the sentiment at the G7 summit correctly, most nations are tired of the Trump administration. Thus, the trade war threatens to increase its scope. Either way, you should probably sit out ADDYY stock until the coast clears.
DR Horton (DHI)
One of the easiest candidates for worst stocks in this potentially arriving recession is DR Horton (NYSE:DHI). Now, I’m not necessarily picking on DHI stock. However, billed as “America’s largest homebuilder,” I don’t have much confidence in the name. After all, buying a new home is the last thing people will be thinking about in an economic downturn.
That said, I understand why DHI stock appeals to contrarian thinkers. For one thing, shares have done very well this year thanks to the economic recovery. Secondly, the Federal Reserve has incentivized home purchases through cutting benchmark interest rates.
But if this trade war leads to a recession in the U.S., we could see unemployment rise due to layoffs. Naturally, this would inspire belt-tightening actions which aren’t conducive for durable acquisitions like real estate. Plus, who’d want to leverage themselves to a mortgage under a shaky economy? For this reason, I’m avoiding DHI stock.
I was recently at one of San Diego’s most popular shopping malls when I realized something: it was a Saturday afternoon, yet getting into the parking lot and finding a good spot was remarkably easy. Walking around, I couldn’t help but notice that the atmosphere was dead.
Granted, my observations are admittedly anecdotal. However, the downturn in brick-and-mortar retail is verifiable, which is why I’m hesitant on Macy’s (NYSE:M). Recently, M stock has plunged into absolutely scary depths. Moreover, shares have traded inside an ugly bearish trend channel late July of last year.
There are two problems that are weighing on M stock. First, as I mentioned above, foot traffic at shopping centers has been steadily declining. Unfortunately, malls are becoming irrelevant thanks to Amazon (NASDAQ:AMZN) and other e-commerce retailers.
I might overlook this problem, though, if the trade war wasn’t raging. Certain items like clothing and footwear lend themselves to the physical retail platform. However, M stock has serious China risks because that’s where many of their products originate. With tariffs causing price hikes, shoppers will move elsewhere.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.