The equity markets are facing multiple headwinds in the near to medium-term. There has already been a significant correction in growth stocks in the last few months. However, investors should be selective in accumulating stocks. There are several stocks to avoid during a recession.
A Bloomberg Markets survey indicates that nearly 50% of investors expect a recession in the U.S. in 2023. This seems likely considering the fact that the central bank pursuing contractionary monetary policies. Furthermore, geo-political tensions will have an impact on growth in the coming quarters.
Talking about recession and its impact on sectors, there are broadly two types of goods: luxury and necessity. In a recession, luxury goods tend to witness a sharper decline in demand. Also, industrial commodities and energy prices tend to decline on relatively lower demand.
With this overview, let’s talk about five stocks to avoid during a recession.
I believe that Lucid (NASDAQ:LCID) is attractive for the long-term. However, it would be among the stocks to avoid during a recession.
It’s worth noting that Lucid has lowered its production guidance for 2022. That’s one factor that has already depressed the stock. In a recession scenario, the outlook for 2023 might be subdued.
A key reason is that the company’s first model is a luxury car than a car for the mass market. The demand for the car is therefore elastic in nature.
Lucid had initially guided for cash burn through 2024. A potential recession in 2022 or 2023 would also imply cash burn extending beyond this guidance. That’s another reason to be bearish as it would imply equity dilution.
Overall, the electric vehicle industry is positioned for multi-year growth. However, the outlook for LCID stock is bearish in an economic downturn. A sharp correction from current levels would be attractive for accumulation.
Over a 12-month period, Freeport-McMoRan (NYSE:FCX) stock has been sideways. At a forward price-to-earnings-ratio of 9.69 times, the stock looks attractive.
However, in a recession scenario, I would avoid the stock. In general, a recession is associated with a decline in demand for industrial commodities. This is likely to translate into a correction in copper prices and reduced cash flows for Freeport.
It’s worth mentioning here that FCX stock is attractive for the long-term. The global demand for copper will continue to rise with investment in green energy.
Freeport has also utilized higher copper prices and cash flows to deleverage. For Q1 2022, the company reported net-debt of $1.3 billion. Further, the leverage ratio for the same period was 0.1x.
With ample financial flexibility and visibility for increase in copper and gold production, the long-term outlook is positive. Freeport plans $6.2 billion in capital expenditure for 2022 and 2023.
Overall, Freeport can comfortably navigate any near-term headwinds. FCX stock might however correct if global demand for commodities declines in a recession scenario.
From a fundamental perspective, Chevron (NYSE:CVX) is among the top stocks to consider from the oil and gas sector. With higher oil price, CVX has surged by 54% in the last six-months.
However, I would include it among the stocks to avoid during a recession. With the geo-political risk premium, it’s unlikely that there will be a big correction in oil. Even in a recession scenario. Having said that, even if oil declines to $80 per barrel, oil and gas stocks will witness some correction.
Coming back to the positives, Chevron has a strong balance sheet and significant proved reserves. The company’s reserve replacement ratio has also averaged over 100% in the last few years.
With strong operating cash flows, Chevron is positioned to invest in exploration and renewable energy sector. CVX stock also offers an attractive annualized dividend of $5.68 per share. Dividends are sustainable even in a recession scenario.
Overall, CVX stock can correct by 20% from current levels if there is a recession. I would look at any such correction as a buying opportunity.
The travel and tourism industry were impacted due to the pandemic. With vaccinations and decline in infections, air travel has gained traction.
However, in a recession scenario, it makes sense to stay away from airline stocks. Consumers tend to cut down on luxury travel during recession and this factor is likely to impact sentiments.
American Airlines (NASDAQ:AAL) has declined by 10% for year-to-date 2022. I believe that there is further downside on the cards if there is a meaningful economic slowdown.
I would also avoid AAL stock considering the fact that the company is significantly leveraged. As of Q1 2022, the airline reported total debt of $37.8 billion. The company plans to repay $15 billion in debt by 2025. However, a potential recession can further stress the balance sheet.
It’s also worth noting that Brent oil trades above $110 per barrel. American Airlines will have a negative impact on margin due to rising fuel cost. Considering the near-term headwinds, I would avoid AAL stock during a recession.
Another stock from that travel and tourism industry to avoid in a recession scenario is Carnival Corporation (NYSE:CCL).
An interesting point to note is that even with healthy bookings reported during Q1 2022, CCL stock has continued to trend lower. There are two reasons for this downside.
First, Carnival has a stressed balance sheet and it would take years to reduce the debt servicing cost significantly. In an environment of rising interest rates, the company faces higher debt servicing cost on potential debt refinancing.
Further, with fears of recession, cruise travel might again be impacted negatively in 2023. Additionally, Carnival faces margin pressure due to rising fuel and food cost.
It’s therefore not surprising that CCL stock has declined by 27% in the last six-months. Further, correction would present a good trading opportunity. However, I would avoid any long-term exposure to the stock considering the balance sheet health.
On the date of publication, Faisal Humayun did not hold (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.