3 Hot Stocks to Avoid Into the Second Half of 2022

  • Investors should know these hot stocks to avoid now.
  • Campbell Soup (CPB): Its inverse relationship to markets is a risk.
  • Walmart (WMT): Fans overdid the rally.
  • U.S. Steel (X): Its income growth may be unsustainable.
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Source: Roman Samborskyi/ShutterStock.com

The stock market is finding it hard to establish strong footing. There have been rallies, but the bulls have failed to sustain them. Meanwhile, there is a basket of stocks that have done too well. Today we will highlight three stocks to avoid that may be running out of power. This week there is unusual extrinsic risk. Mainly that investors will focus on the FOMC event. U.S. Fed chair Jerome Powell could spook all equities into a correction. He will deliver the committee’s decisions on rate hikes going forward.

The stock market reaction to those comments is hard to predict. During their last meeting he wasn’t particularly nice to Wall Street. Yet stocks rallied 11% non-stop. Overall, there is still a healthy risk for appetite among investors but not in all areas. Some sectors have seen too much love. From those we will highlight three stocks to avoid going into the second half of the year. Investors will do well being ready for a shakeout this week.

These stocks have benefited from prevailing memes like with the oil sector to name one. Chevron (NYSE:CVX), which is in the business of fossil fuels, made new highs. This is not right since the world is phasing its product out completely from transportation. Just like CVX, my three choices of stocks to avoid deserve accolades. Their teams have succeeded in the face of adversity, and they may have healthy businesses. My issues with them today is more about stock price levels and owners’ expectations.

There is a high chance that investors have committed to them too heavily. Not many reassess the thesis often enough, so they risk extending expectations too high. Then disappointments come quickly and without warning. The stocks to avoid are ones that have delivered the easy money already. The size of the remaining upside opportunities pale versus the potential downsize risks.

Ticker Company Current Price
CPB Campbell Soup $47.22
WMT Walmart $152.99
X U.S. Steel $30.49 

Campbell Soup (CPB)

Campbell Soup (CPB) Stock Showing Inverse Relationship to the S&P
Source: Charts by TradingView

Campbell Soup (NYSE:CPB) stock fell 2% on Friday, so it let some steam out already. But my warning is about the general band of resistance that lies above that. Investors should expect this to be a heavy roof for a while. Rallies into $51 per share should be reasons to chase it. The shorter-term charts may show relative support, but that too can be deceiving. CPB stock has support through $39 per share. But if that fails then it could accelerate another 15% from there.

The CPB business is not flashy or impressive, at least not on paper. The revenues have been relatively stagnant for years. In 2021, they barely beat sales from 2015. The net income is a bit better, but also underwhelming. The run up in the stock here is from algorithmic trading more than stock strength. For some reason, the CPB chart is noticeably inversely related to the S&P 500. It’s like money managers are using it to park money on tough market days.

As a result, it now has two potential problems brewing. The first is its own rising wedge, which creates short-term weakness. And the second is that market rebounds could also bring it pain from algo selling.

Walmart (WMT)

Walmart (WMT) Stock Showing Vulnerable Rising Wedge
Source: Charts by TradingView

Before ragging on the Walmart (NYSE:WMT) stock opportunity, I’d like to commend its management. They steered their massive ship into the online shopping era with relative ease. They realized the threat that Amazon (NASDAQ:AMZN) brought and they acted swiftly. As a result, their financial metrics remained consistent.

WMT doesn’t show much growth, but it’s hard to do so at this size. This suggests that the massive growth in AMZN did not come from WMT. So management is likely to win long term. Short term, WMT stock carries a bit of extra risk. It just set a new all-time high when markets are crashing. This is counterintuitive and causes me to worry a bit. There may be a catch up trade lower to come back in line. The least investors can do is avoid chasing this stock up to high heaven. Not when the indices are teetering on losing another 15% this month.

The weekly chart is showing a sharp rising wedge. These often revert lower without warning. WMT stock could fall 12% before finding footing at its $134 support zone. At the risk of getting too deep into technicals, there is divergence risk. The stock’s internals are not as solid as the stock price. This often means that the price will revert to match the internals.

U.S. Steel (X)

U.S. Steel (X) Stock Chart Showing Potential Resistance Zone
Source: Charts by TradingView

My third pick of stocks to avoid today was a close call between U.S. Steel (NYSE:X) and Lockheed Martin (NYSE:LMT). I opted for the one that looked more iffy from a fundamental basis. LMT stock has the weaker technical setup and the largest potential downfall scenario. But X is the one with the more erratic income statement. The current X fundamental metrics look strong, but that has not always been the case. Of the last eight years, four had net income losses. Even if we allow leeway for 2020, LMT had none.

Therefore, I fear that the income bump that X is enjoying won’t last. And if indeed the global economies are going to suffer a bit then X’s gravy train may be ending. Central banks will be waging wars on inflation like the U.S. Federal Reserve. In fact, the rhetoric from the Fed is ridiculously hawkish now. The growth environment will have a strong headwind from the aggressive rate hike cycle they’ve telegraphed. We will learn more about this in two days.

Even though X stock has already lost 20% from its recent highs, there might be more. The rallies from here should face heavy selling, so the propensity will be to set a lower low thereafter. The trend will likely take a negative slope, so investors should avoid chasing them. If X falls into its support near $21, it would then make for a better trading opportunity.

On the date of publication, Nicolas Chahine 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.

Nicolas Chahine is the managing director of SellSpreads.com.


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