As of the latest news at the time of writing, CNN reported that debt-ceiling negotiations broke down, which means that investors should at least consider stocks to sell before recession strikes. Sure, it’s possible that Democrats and Republicans can come together to prevent catastrophe. Even so, investors should also be aware of another problem: the consumer debt crisis.
According to a recent CNBC report, total consumer debt hit a fresh new high in the first quarter of 2023, driving the metric past the $17 trillion mark. Not only that, this dynamic occurred even with a sharp pullback in home borrowing. Specifically, new mortgage originations – including refinancings – totaled just $323.5 billion, the lowest level since Q2 2014. Therefore, it’s time to consider stocks to avoid a bear market.
For this list of stocks to sell before the crash, we’ll be exploring enterprises that may carry unusually high risks given the scenario. Of course, if the political class and the Federal Reserve manage to pull rabbits out of hats, this discussion would be pointless. Unfortunately, circumstances seem pressing, to put it diplomatically. So, these are the stocks to sell before a recession hits.
Zillow Group (Z, ZG)
Source: shutterstock.com/Black Salmon
On the surface level, Zillow Group (NASDAQ:Z, NASDAQ:ZG) doesn’t appear to warrant inclusion in a list of stocks to avoid in a bear market. Since the beginning of this year, Z gained almost 36% of its equity value. And in the trailing year, it’s up nearly 11%, having seemingly recovered nicely from the tribulations of 2022. However, on a weekly average basis, Z shares traded near $200 in early 2021.
Against a longer-term framework, the narrative suddenly doesn’t look so credible. As well, if a downcycle appears on the distant horizon, both Z and ZG would qualify as stocks to sell before the recession strikes. Really, it just comes down to common sense. Under a severe slowdown, companies would cut costs, translating to mass layoffs. Typically, unemployed people don’t qualify for mortgages.
Moreover, Zillow isn’t exactly printing desirable financial stats as we stand. For example, the company’s three-year revenue growth rate sits at 15.3% below zero. As well, its trailing-year net margin is 5.8% below breakeven. Adding insult to injury, Zillow appears overvalued relative to forward earnings. So, it’s a name to avoid during the consumer debt crisis.
Source: shutterstock.com/Leonid Sorokin
When it comes to stocks to sell before a recession hits, LoanDepot (NYSE:LDI) sells itself, unfortunately for the bulls. Again, government data shows that total consumer debt hit over $17 trillion. There used to be a time when that was our national GDP. Plus, many folks made a big deal about it when the U.S. national debt and the GDP reached a one-to-one ratio.
Put another way, the last thing Americans need is to incur more debt. As the debt clock demonstrates, borrowing excessive money can spiral out of control. Either way, Americans appear to be getting tapped out. As stated earlier, new mortgage originations faded to multi-year lows. Thus, LoanDepot may suffer from a diminishing addressable market.
Not only that, it might not even act well as one of the consumer debt relief stocks. That is, LoanDepot offering unsecured personal loans could jeopardize the company, especially during a recession. Thus, LDI ranks among the stocks to avoid in a bear market.
In choosing Carvana (NYSE:CVNA) as one of the stocks to sell before a recession hits, you might think I’m beating a dead horse. However, that’s not the case. Some of you might recall (although I’d like you to forget) that I vouched for an auto dealership last year. For several stints in 2022, the company in question performed well. After all, recession or no recession, people need personal transportation, especially on the west coast.
However, what they need are vehicles that can be purchased at the lowest price possible. Unfortunately, the nature of the beast at Carvana is that it can’t do that. By offering a home delivery service, Carvana has to make up the money for providing said convenience. Therefore, at scale, it can’t beat traditional dealerships. Certainly, it can’t outflank private-seller transactions.
With cheaper (albeit less convenient) options available, CVNA would have to be one of the stocks to sell before the crash. Even as circumstances stand now, investment resource Gurufocus warns that Carvana suffers from eight severe warning signs, such as high debt and a distressed balance sheet.
ElectraMeccanica Vehicles (SOLO)
On Friday, ElectraMeccanica Vehicles (NASDAQ:SOLO) posted a strong performance in the charts, with shares gaining over 7%. Further, on Fintel’s proprietary Short Squeeze Score, it hit 71.48 out of 100, with higher numbers indicating a greater probability of a short squeeze materializing. Nevertheless, I agree with my InvestorPlace colleague Muslim Farooque. SOLO ranks among the stocks to sell before the recession strikes.
In part, Farooque stated that “[t]he company is burning through an estimated $20 million in cash reserves each quarter. Its decision to shift EV production from China to the U.S. should weigh down its bottom line further.” Obviously, that’s the financial headwind. Fundamentally, my colleague stated that the underlying electric vehicle market is crowded.
At this point, we’re dealing with pure speculation and that’s not a place to be in during an economic downturn. As CNN mentioned, during shaky times, you want to focus on high-quality names. By that, I’m pretty sure the definition doesn’t include publicly traded securities that lose almost 69% in the trailing year.
F45 Training (FXLV)
Initially, the global fitness community F45 Training (NYSE:FXLV) generated considerable buzz. Part of the bullish narrative came down to cynicism. As Harvard University and several other sources reported, a great many Americans experienced weight gain during the Covid-19 pandemic. No kidding. Sitting around eating Doritos while pretending to work can its toll on the human body.
Plus, you also had the whole Mark Wahlberg thing, with the actor backing the enterprise. Understandably, Wahlberg has a controversial past but he’s also evolved to become a likable celebrity. Well, that might change, and not for the better. Since the start of the year, FXLV slipped more than 67%. Since its public market debut in 2021, shares hemorrhaged almost 95%. You don’t need to think too hard about it: FXLV is one of the stocks to sell before the recession strikes.
Another obvious idea for stocks to sell before a recession hits is department store Macy’s (NYSE:M) — an American icon. From a historically and socially significant narrative, my hat’s off to the retailer. However, when it comes to discussing public corporations to steer clear of in case of a downturn, Macy’s ranks “highly” on the dubious list.
Again, M stock comes down to logic. During a recession, consumers will focus on critical goods. Further, their spend will likely be diminished considerably because of mass layoffs. Further, Macy’s doesn’t really specialize in necessary products. Sure, clothing is a necessity in 99% of establishments. However, you can always go to off-price retailers for that purpose.
In all fairness, Macy’s financials aren’t that bad. For example, its trailing-year net margin stands at 4.66%, above 65.81% of cyclical retailers. However, with consumers downsizing their spending even before a recession has struck, we’ve got to address the obvious: M would rank among the stocks to avoid in a bear market.
Hut 8 Mining (HUT)
While I’ve been cautious about cryptocurrencies and the related ecosystem, it’s for a reason. At one point, the total market capitalization of all cryptos was flying toward the $3 trillion level. At the moment, the sector commands a valuation of around $1.12 trillion. That’s still respectable but far off from the highs. However, that might be the contrarian appeal behind blockchain miner Hut 8 Mining (NASDAQ:HUT).
Though intriguing, my biggest problem with HUT and its ilk comes down to the labor market. If a recession materializes, then fewer people will have the funds needed to invest in volatile assets like virtual currencies. So far, circumstances look decent. But that could change quickly, especially with the aforementioned $17 trillion of consumer debt. Thus, HUT seems one of the stocks to sell before recession strikes.
Moreover, the other challenge for Hut 8 comes down to crypto dependency for its business. In 2021, the company posted revenue of $135.76 million, up 327% against the prior year. However, in Q1 2023, Hut 8 posted sales of only $13.9 million, down 67% year-over-year. I’m afraid it belongs on the short-squeeze stocks list.
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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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