Investing isn’t for the faint of heart at this time, with inflation rates near 40-year highs and the Federal Reserve raising interest rates aggressively. The U.S. is on the verge of a recession, while the S&P 500 entered bear market territory recently. Investors are re-evaluating their strategies and looking to avoid selling stocks in a recession.
A recession relates to an economic slowdown, with a significant fall in consumer spending. Typically, a slowdown in economic activities could potentially last for several quarters. It is a well-known aspect of the economic cycle followed by a growth phase, which every investor is yearning for at this point. Stock prices have fallen off a cliff and the recent pullback in prices has resulted in bargains. However, not every stock is worth investing in on the dip.
Here are seven stocks to sell in a recession:
American Airlines Group Inc.
JetBlue Airways Corporation
Carnival Corporation & plc
Campbell Soup Company
Wynn Resorts, Limited
Mercury General Corporation
Stocks to Sell: American Airlines (AAL)
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In the past year, American Airlines (NASDAQ:AAL) stock was a popular pick among investors betting on the post-pandemic recovery in the airline sector. Moreover, there was a time last year when the airliners market capitalization exceeded pre-pandemic levels, despite the growing debt load and continual losses. Investors are now confronted with a bigger behemoth with the impending recession and AAL stock is far from being a solid wager at this time.
AAL recently posted its first-quarter (Q1) results, which show a trend toward recovery in the summer. Nevertheless, it remains highly leveraged, with its gross debt at $38.1 billion at the conclusion of last year. The figure represents a 56.8% increase in its debt load from the beginning of 2020. American Airlines is on track to lose money again this year as it continues to increase its capital expenditures. With rising costs due to inflation, it is tough to see how it can return to profitability soon.
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The airline industry has been under duress due to higher oil prices and recession-related fears that will likely impact debt repayments. Companies have built up massive debt loads in the process, but JetBlue (NASDAQ:JBLU) is one of the top airliners that has done well to maintain its financial flexibility. However, all that could change in its relentless bid to acquire Spirit Airlines (NYSE:SAVE).
JetBlue plans on using cheap debt to finance its offer, but the deal will likely take its debt balance beyond the $6.5 billion mark. Moreover, a $350 million break-up fee is payable if the regulatory process falls through. Additionally, it also has to pay an accelerated prepayment of $1.50 per share. JBLU’s debt load fell almost 17% to $4.76 billion last year from 2021. However, its work is now under threat of being undone.
Stocks to Sell: Carnival Corporation (CCL)
British-American cruise operator Carnival Corporation (NYSE:CCL) has had a rough couple of years in the stock market. With its ships docked at port for the bulk of the past two years, CCL stock shed over 50% of its value last year. Moreover, it burned through a whopping $2 billion every quarter with no cash-generating options.
As per a recent filing, it has a hefty $36 million in debt, representing a massive increase from the $14.43 billion it carried in 2019. Its balance sheet is in disarray and has limited wiggle room to navigate the current crisis. Inflation is likely to play spoilsport despite the resumption of its operations. Hence, a substantial pull-back in revenues and profits is likely this year.
Campbell Soup Company (CPB)
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Consumer staples giant Campbell Soup Company (NYSE:CPB) faces tough challenges due to receding pandemic headwinds and rampant inflation. It’s on the path to transforming its portfolio and controlling its costs as much as possible. However, its consumer packaged goods business is challenged by the shift in consumer tastes, suggesting that any revenue growth is likely to be delivered through market share gains.
It recently reported its Q2 results where sales fell by 3% on a year-over-year basis to $2.2 billion. Moreover, gross profits dropped by 15% from the prior-year period to $669 million. Cost inflation and other supply chain constraints will likely cut into margins in the upcoming quarters. Moreover, with the business highly levered, it limited its ability to push on and grow through significant acquisitions.
Stocks to Sell: Wynn Resorts (WYNN)
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Wynn Resorts (NASDAQ:WYNN) is a designer and developer of integrated resorts. It has a leading presence in Macau, which relies mainly on tourists from mainland China. However, with the tight coronavirus-related restrictions imposed by the Chinese Communist Party, it will likely suffer for the rest of the year. Macau represents close to 70% of Wynn Resorts’ sales. Moreover, it is unlikely that the stock will recover to pre-pandemic levels soon.
Considering the current conditions, a full recovery in Macau is unlikely this year. Couple that with the recessionary forces and tourist demand is likely to lag for the foreseeable future. Hence, its tough to be bullish on Wynn Resorts stock at this time.
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MicroStrategy (NASDAQ:MSTR) is a popular business intelligence specialist that provides analytical software tools to enterprises to help them make more informed decisions. It aims to expand its software clientele whilst simultaneously growing its Bitcoin (BTC-USD) holding. It has recently taken out billions in loans using Bitcoin as collateral, but the market volatility has investors fretting over MSTR stock’s long-term viability.
MSTR is quickly becoming a Bitcoin-linked stock in the eyes of the investing world. BTC has been highly profitable during a bull market, but a recession or a bearish market has had a track record of wrecking the asset. Hence, cryptocurrencies are far from being recession-resistant and are now closely linked to the stock market. MicroStrategy seems to have missed the trick by putting all its eggs in one basket and now faces a real threat to its solvency if similar conditions remain for the foreseeable future.
Stocks to Sell: Mercury General (MCY)
Mercury General (NYSE:MCY) is a property and casualty insurer specializing in the Californian market. Despite its advantageous position in the market, its fundamentals are remarkably weak with weak technical profitability. Its lack of diversification makes it one of the poorest investment choices compared to its peers.
Homeownership and auto insurance rates are likely to go up in line with the rising inflation rates and the potential recession. Bank of America (NYSE:BAC) analyst Joshua Shanker states, “With the American consumer already strained by compounding inflation, a hike in their auto and home insurance policies will be most unwelcome.” Although insurers are likely to pass on the risk to reinsurers, the rapid increase in catastrophic events will compel reinsurers to increase their rates. Hence, Mercury and its peers are in for a bumpy road ahead.
On the date of publication, Muslim Farooque 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.