If we follow the common wisdom, the Federal Reserve raised interest rates in what could be its last major action against inflation, which would then make stocks to sell in a hawkish environment seem completely irrelevant. For what it’s worth, I hope that this list of publicly traded enterprises to watch out for ages like milk.
Frankly, a deflationary ecosystem – one where fewer dollars chase after more goods – wouldn’t be good for my business. Nevertheless, it’s also to prepare for various scenarios. After all, if the Covid-19 disaster taught us anything, it’s that stability and predictability represent statuses that should never be taken for granted. Therefore, we should consider stocks to sell if the Fed imposes a plot twist.
In addition, geopolitical rumblings – particularly the production cuts by the alliance between the Organization of the Petroleum Exporting Countries (OPEC) and non-member oil-producing nations – known as OPEC+ – broadcasted that the Fed alone isn’t the only major influencer of the dollar. Therefore, investors should keep an eye on these stocks to sell, just in case.
Should inflation remain stubbornly high, forcing the Fed to respond with continued interest rate hikes, then real estate brokerage firm Redfin (NASDAQ:RDFN) would probably transition to become one of the stocks to sell. Of course, right now, RDFN appears one of the securities to buy, considering its blistering gain of 135% year-to-date. Still, higher borrowing costs would probably kill the rally.
For one thing, even with the brilliant performance in 2023 thus far, it’s still down 9% in the past year. That just shows you how troubled the housing market has been since the Fed aggressively raised rates in 2022. Further, circumstances might worsen for Redfin and its ilk. For current homebuyers, the market doesn’t seem like it’s cooling because of the low inventory dilemma. Nevertheless, on average, the market is fading against the year-ago framework.
However, if the Fed steps in with more aggressive hikes, RDFN might be one of the stocks to sell. Per investment resource Gurufocus, the underlying enterprise suffers from seven red flags, including the issuance of new debt.
At the moment, homebuilder Lennar (NYSE:LEN) seems a very attractive company. According to Gurufocus, Lennar sports a solid balance sheet, featuring a cash-to-debt ratio of 0.82 which ranks above 63.55% of its rivals. In addition, its Altman Z-Score pings at 4.73, indicating high fiscal stability and a low risk of imminent bankruptcy. Operationally, Lennar fires on all cylinders. Its three-year revenue growth rate pings at 18.5% while its net margin clocks in at 13.86%. Plus, the market prices LEN at a trailing multiple of 7.06. As a discount to earnings, the company ranks better than 63.95% of the competition.
However, if the Fed raises rates, LEN could become one of the stocks to sell. Basically, the main concern centers on higher borrowing costs eventually sparking a recession. If mass layoffs accelerate, then housing demand will almost surely correct downward. Further, Lennar would need to keep a close eye on its days’ inventory stat. If this figure gets too elevated, it would be much more difficult to recover if the Fed gets super hawkish.
Rocket Companies (RKT)
While Redfin and Lennar above might not be stocks to sell right now, you can make a case that it’s time to start thinking about exiting Rocket Companies (NYSE:RKT). While the mortgage-providing enterprise gained over 12% of market value since the Jan. opener, its recent performance presents concerns. For example, in the trailing month, RKT stumbled more than 13%.
According to Gurufocus, RKT rates as significantly overvalued and it’s not that difficult to see why. Basically, while Rocket might ping as a discount across certain metrics, with a three-year revenue growth rate of 61% below zero, at some point (soon), the negative fundamentals will catch up. Also, its net margin unsurprisingly sits in negative territory, posing massive risks.
If that wasn’t bad enough, Rocket also suffers from a challenged balance sheet. At the moment, its cash-to-debt ratio is 0.09 times, ranked worse than 94% of the competition. As well, its equity-to-asset ratio is 0.03, worse than 97.16% of its peers. I’m afraid it’s probably one of the stocks to sell now.
Even without the help of unfavorable monetary policies by the Fed, Nordstrom (NYSE:JWN) presents a difficult case for even the most dedicated bulls. Since the beginning of the year, JWN slipped 8%, which might not seem that bad. However, in the trailing one-year period, JWN tanked by almost 42%. And in the past five years, shares slipped just over 68%.
Frankly, I don’t like the erosion of value and it keeps fading away. Obviously, if the Fed raises borrowing costs, that’s going to impose a critical roadblock for Nordstrom and its ilk. As a discretionary retail player, people don’t need to go to its department stores. And with entities like Amazon (NASDAQ:AMZN), you can get what you want quickly, cheaply, and conveniently.
For me, the biggest barrier centers on consumer sentiment, which sits near multi-year lows. Also, its financials don’t look that hot. Suffering from a negative three-year revenue growth rate, Nordstrom has less-than-desirable stability in the balance sheet. It could easily become one of the stocks to sell if the monetary hawks get their way.
Trading for only 78 cents a pop, shares of Vroom (NASDAQ:VRM) already signal massive problems. Further, at this rate, the company – which specializes in online transactions for vehicle purchases – carries a market capitalization of less than $110 million. Since the beginning of this year, VRM dropped over 19% in market value. In the past year, VRM gave up over 48%. For most folks, it’s one of the stocks to sell.
Fundamentally, it’s difficult to see how online car dealers can survive in this tough consumer economy. Don’t get me wrong – I believe in auto dealerships because people need transportation. However, without the threat of the Covid-19 pandemic, few have the incentive to trade higher prices for convenient, contactless services. Instead, consumers look for the lowest cost possible.
Financially, VRM seems terribly risky. For example, its three-year EBITDA growth rate pings at 29.9% below zero. Also, its trailing-year net margin sank to 17.72% below breakeven. Adding insult to injury, its Altman Z-Score sits at 0.81 below zero, indicating a deeply distressed enterprise.
SoFi Technologies (SOFI)
While financial technology (fintech) specialist SoFi Technologies (NASDAQ:SOFI) always garnered popularity among retail investors, it lost much of its sheen recently. As I reported earlier, Wedbush analysts downgraded SOFI stock, warning about a possible significant decline in fee income. In addition, spiking personal loan obligations might impose challenges down the line.
According to Gurufocus, its present financial profile is rather unremarkable. For example, its three-year revenue growth rate sits at 22.9% below zero. Its trailing-year net margin lands at 14.25% below breakeven. Also, with a cash-to-debt ratio of 0.4, SoFi ranks slightly better than middling for the industry.
Unfortunately, if the Fed does hike rates, the problems impacting SOFI will likely worsen, making it a candidate for stocks to sell. In particular, I’d worry about the personal loan originations. Here, we’re talking about unsecured loans. So, if borrowers can’t pay back the loans, then SoFi would be up a brown creek without a paddle.
Whether EZCORP (NASDAQ:EZPW) sits among the stocks to sell, I can go either way. On the contrarian front, I recognize the cynical nature of EZCORP’s pawn shop business. To be sure, pawn shops provide credit access to the unbanked community, which is important. However, the industry itself can sometimes be predatory. Still, when you’re desperate under difficult economic circumstances, you’ll take bad deals to stay above water.
On the other hand, if the Fed continues to raise rates, those who are bullish on EZPW should reassess the narrative. I’m not here to say that you’d be wrong to continue holding EZPW. Unfortunately, though, even pawn shop customers might not want to get loans under unfavorable borrowing costs. In addition, the hawkish environment may stymie the buying-and-selling component of the pawn shop business model.
Financially, I wouldn’t consider EZCorp to be distressed. However, it’s not remarkable. For example, its Altman Z-Score comes in at 2.09, which is in the gray zone of fiscal stability. Also, trading at a multiple of 21.32, EZPW is overvalued.
On the date of publication, Josh Enomoto 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.