Over the last few weeks, there have been more than enough reasons to be skeptical about the record-breaking run in equities. Recently, I’ve been harping on the ridiculous amount of speculation in the market. But even more problematic is the Covid-19 pandemic. Just when you thought the crisis was fading into the rearview mirror, cases are surging again. Considering the pandemic’s historical impact on the market, now is the time to think about stocks to sell.
But the novel coronavirus isn’t the only thing that can cause stock prices to plunge. Data from the Financial Industry Regulatory Authority shows that stock trading on margin continues to jump to record heights. Keep in mind that rampant speculation — that is, buying equities on margin — contributed to the market crash that catalyzed the Great Depression. I can’t help but wonder if history is going to repeat itself.
I’m not recommending short selling, which is a direct bet against a company’s prospects. Instead, investors should consider trimming their exposure to certain companies because their underlying industry may be under threat.
Please don’t misread the overriding theme of this article. I’m not here to bash individual companies. But we’ve all seen how nasty the coronavirus can get when we let our guard down. Investors should prepare for the possibility of a long winter. Therefore, here are some stocks to sell — or at least consider trimming:
Royal Caribbean (NYSE:RCL)
Delta Air Lines (NYSE:DAL)
Simon Property Group (NYSE:SPG)
While it’s important to be cautious about buying into a frenzied market, it’s just as important — if not more so — not to panic. I’m not suggesting that you should dump all of your shares. But just like in gardening, it pays to trim sickly leaves. In this case, your approach should focus on managing potential risks.
Stocks to Sell: Royal Caribbean (RCL)
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With significant improvements in Covid case management — mostly sparked by the encouraging vaccine rollout — Royal Caribbean and the cruise ship industry seemed like a reasonable contrarian bet. Sure, there were lingering doubts about the narrative, especially with the wealth gap exacerbated by the public health crisis. But you can also never doubt the power of the American consumer.
Driven by retail revenge or the desire to make up for lost time, RCL stock was initially one of the top performers of 2021. Even on a year-to-date basis, RCL is up more than 5%. But over the trailing month, shares are down 5%, which is problematic. The negativity likely indicates growing concerns about rising Covid-19 case numbers.
I want to be absolutely fair — it’s possible that because millions of Americans are already vaccinated, the surge in cases may not be as devastating as it was initially.
At the same time, Royal Caribbean suffered a net loss of nearly $5.8 billion in 2020 compared to net income of $1.9 billion in the prior year. Frankly, Royal Caribbean and the rest of the cruise ship industry can’t afford another crisis, no matter how well-mitigated it is. Unless you’re feeling particularly brave, I’d put RCL shares on your list of stocks to sell.
Delta Air Lines (DAL)
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I want to be gentle with Delta Air Lines since it put customers over profits by blocking the middle seat far longer than its competitors. Unfortunately, when you’re talking about a nasty pandemic like Covid-19, moral victories are not enough when it comes to a company’s stock.
This isn’t about picking on Delta and its business. I just think its broad focus on domestic and international routes exposes it to greater risk than, say, a domestically-geared discount airliner like Southwest Airlines (NYSE:LUV).
With Southwest and its ilk, you’re likely dealing with travel of necessity. But with Delta, you’re dealing with that and travel of discretion, which is where the problem lies. For instance, European countries are ramping up their Covid-related restrictions and mitigation policies. That’s not exactly ideal for those wanting to enjoy stress- and hassle-free vacations.
Stocks to Sell: Imax (IMAX)
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World famous for its immersive cinematic experiences, Imax has long specialized in blurring the difference between fantasy and reality. Certainly, the company represented the answer to the paradigm shift that streaming services like Netflix (NASDAQ:NFLX) imposed.
When folks are able to watch compelling content at home, how can Hollywood and the cineplex industry compete? The answer, of course, has been to double down and lead with your strongest attribute. For Imax, this meant expanding upon the immersive element that previously attracted generations of cinema lovers. No matter how much you love watching shows on your flat screen TV, it can’t compare to the experience-centric environment Imax can provide.
Thanks to declining Covid-19 cases earlier this year, the movie industry began welcoming back audiences. But as the delta variant starts to ravage states and regions with low vaccination rates, we may have another national crisis on our hands. If so, the circumstances don’t look good for Imax.
In 2020, the company suffered a net loss of nearly $144 million. But between 2009 and 2019, it strung together consecutive positive earnings. Frankly, if we don’t dodge the delta bullet, you should consider adding IMAX to your list of stocks to sell.
Ordinarily, you wouldn’t expect a consumer discretionary company to perform well during a health and economic crisis. But then, those who doubt Elon Musk and Tesla often pay for their crimes — believe me, I would know. However, it’s also true that Tesla and electric vehicles in general benefitted from the pandemic’s unusual dynamics.
Everyday consumers realized that owning combustion cars is a pain in the rear during a pandemic. First, there’s the regularly scheduled maintenance items, such as oil changes every 3,000 to 5,000 miles or whatever.
Second, if you don’t run your combustion car on a somewhat frequent basis, things start to ache and rot. More than a few times, my car battery gave out, forcing me to jump-start my vehicle. The upshot? I’m now an expert at jump-starting vehicles. But this is hardly an ideal form of vehicle ownership.
As you know, EVs use far fewer moving parts. Therefore, all other things being equal, EVs are more reliable and require less intensive maintenance. But the downside is that vehicles with advanced electronics typically use more semiconductors than your average car.
Therefore, the global supply chain disruption of computer chips is a drag on the automotive industry. But it’s probably more of an intense headwind for Tesla. At the very least, it’s imposing an opportunity cost, which is why you may want to think about selling some TSLA shares.
Stocks to Sell: AutoNation (AN)
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AutoNation is a tricky one because of the incredible demand for used cars these days. Moreover, this demand profile could continue surging into 2022 according to AutoNation CEO Mike Jackson.
Is this a case of an opinion layered in self-interest? I’m not sure you can entirely remove that suspicion from the table. Nevertheless, Jackson does offer reasonable (and objective) justification for the argument. He suggested that “consumers’ preference for personal transportation coupled with lower interest rates” will drive used vehicle prices higher.
An increase in Covid-19 cases will certainly make people suspicious of public transportation again, so it’s reasonable to expect the car market to remain bullish. At the same time, I think investors can sell AN stock into strength. While it might not happen right away, consumers may eventually run low on funds to buy cars.
Indeed, those hunting for a good deal on cars may just need to wait for the next several months. Should the delta variant ripple through the country and send us back into crisis mode once again, it may impose an economic shock. Furthermore, the federal government has already expended a massive amount of money backstopping both personal and corporate pain.
I’m just not sure we can backstop any more pain, which is why I’m including AutoNation on this list of stocks to sell.
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Harley-Davidson represents the culmination of our culture’s excesses: Harleys are loud, proud and don’t give a flying you-know-what about what you think of them. The problem is that fewer people like them, and those who do are fading into the sunset.
If you want a deeper dive into the woes of HOG stock, you should consult Barron’s contributor David Marino-Nachison’s excellent article on the topic. One factor that stood out to me was that millennials are more likely to attend college than previous generations. As a result, they’re burdened with more debt, which leaves very little room for discretionary purchases.
As it relates to the pandemic, Harleys are completely superfluous. Don’t get me wrong — I’m a car enthusiast, so I can appreciate why many people gravitate toward them. However, investors need to look at the real world. Generally speaking, younger people don’t care about the brashness of their rides. If anything, they care more about their environmental footprint. Harleys have one — and not in a good way.
Most importantly, during a public health crisis, motorcycles of any brand have little utility. Therefore, I’d stay away from HOG stock until the coast clears — or maybe forever.
Stocks to Sell: Simon Property Group (SPG)
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Although I’m not guaranteeing anything, a worsening Covid-19 pandemic could turn Simon Property Group’s recovery rally into a tragedy. Just before the crisis imploded the market in 2020, SPG stock was trading hands around $142. When shares were closing near $136 in June, they were within striking distance of parity.
Without the worrying surge in Covid infections, SPG stock could have broken even and then some. Instead, I’m forced to take the reasonable approach. If you gambled on the stock as a contrarian trade and won, you should consider taking some profits off the table.
As a real estate investment trust (REIT) focused on shopping malls and outlet centers, Simon Property Group depends on strong consumer sentiment. Earlier, the retail revenge concept bolstered SPG stock. But with a resurgence of Covid-19 upon us, I’m questioning the sustainability of its growth.
Remember, it’s not just about the virus. Recently, Los Angeles reinstituted a mask policy for indoor activities. Other cities and states have considered or imposed mask mandates. That may potentially put a damper on physical retail businesses — an economic segment that was already under pressure prior to the pandemic.
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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