As we stare down the possibility of a recession, it’s time to consider which consumer stocks to sell.
Americans are now being thriftier than they have over the past year. Consumers are trading down and that is putting pressure on the U.S. economy which is heavily dependent on consumer spending. In turn, that has created a class of consumer stocks to sell at all costs .
Consumers remained about as pessimistic in April as they were in March regarding the overall economy. And in March consumer spending declined for the first time in two years.
That indicates that consumers are now far more cautious than they were before. The inflationary environment poses a real threat to Americans and the stocks that depend on strong American consumer trends.
If you’re holding any of these consumer stocks to sell, it’s time to think about getting out.
Home Depot (HD)
If that happens it will be the first time since 2009 that Home Depot has experienced a top-line contraction on an annual basis.
Home Depot’s sales contracted by 4.2% to $37.3 billion in the first quarter. During the same period net earnings decreased from $4.2 billion to $3.9 billion.
It’s a clear indication that big-ticket spending is showing sure signs of cracking. That’s perhaps an indication that higher-income consumption is beginning to face serious fiscal realities.
The fact that Home Depot is expecting to shrink for the first time since the emergence from the last recession is worrisome. Home Depot may be a canary in the coal mine for the excessively low-interest rates that prevailed since the last recession 2007/2008.
Booking Holdings (BKNG)
Booking Holdings (NASDAQ:BKNG) stock looks far better than it is because of the post-pandemic halo effect but it’s one of the main consumer stocks to sell while you can.
A cursory glance at its earnings report from early May suggests an extraordinarily attractive company.
Bookings increased 44% to $39.4 billion in the first quarter. And revenues increased 40% to $3.8 billion. But what benefits you one moment can be the same thing that ends up hurting you later. That thing is the pandemic response.
Booking Holdings suffered severely as the pandemic shuttered everything grinding travel to a halt.
The company benefited dramatically as the country exited the pandemic and travel spending spiked, but it was arguably a poor pandemic response that created the money for travel at all.
I expect Booking Holdings will face a situation where that spending swings wildly soon. March saw spending contract. That’ll show up in BKNG stock in Q2 earnings and the pandemic halo will be gone.
Lowe’s (NYSE:LOW) is very similar to Home Depot overall, but has some interesting differences that are bolstering investor confidence in the stock. That confidence is misguided overall and suggests investors should avoid Lowe’s as well.
One of the primary differences between Home Depot and Lowe’s is that the latter skews more toward the DIY consumer.
The notion is that because Lowe’s customers traditionally try to skimp on labor costs it is less likely to be harmed. It makes sense in a way. It seems to suggest that Lowe’s might be able to poach Home Depot customers who trade down in an attempt to DIY.
But data implies DIY projects are actually more susceptible to declines in discretionary spending. So any DIY advantage Lowe’s has is more imagined than real.
The takeaway there is crystal clear: If Home Depot expects to fall then there isn’t any reason to believe that Lowe’s won’t suffer at least as much.
Target (NYSE:TGT) is very clearly moving away from the risks posed by slumping discretionary consumer spending. That truth is in the company’s inventory level changes.
What’s clear is that Target is a behemoth company and one for which quick pivots aren’t easy. That means this consumer slowdown is going to harm TGT stock.
Target’s first-quarter earnings report showed that inventory levels were 16% lower to end the quarter than at the same time last year.
This came with a 25% reduction in discretionary categories. In short, Target is pivoting away from discretionary spending and trying to stock its shelves with items that won’t suffer as much due to a slowdown.
That isn’t easy when you employ 440,000 people at nearly 2,000 locations. Target wants to be a quick, reactive firm, but it isn’t.
It is reacting to weaker discretionary spending but there’s little guarantee that any pivot will do anything but hurt the firm. And this all comes after a first quarter that was already flat.
eBay (NASDAQ:EBAY) shows little reason for investors to consider it currently. It’s not necessarily a bad stock, but flat top-line expectations and weakening operations combine to make it look less than ideal.
The narrative is fairly straightforward. Revenues increased by 1% per the most recent earnings report. Net income fell by 4% eBay is weakening operationally and that’s leading to a worsening bottom line when combined with flat sales.
eBay is expecting revenues to be similarly flat in the second quarter. What’s especially worrisome is that eBay hasn’t been able to capture its share of the overall growth that is occurring. Q1 eCommerce sales increased by 8% but eBay’s sales only grew by 1%. That’s a troubling sign overall for the eCommerce pioneer.
eCommerce sales topped $1 trillion in 2022 for the first time ever. The problem clearly isn’t eCommerce but rather an eBay that needs to revitalize its operations and business overall.
International Paper (IP)
The current story of International Paper (NYSE:IP) stock has a flat top line and is weakening operationally, and that is affecting the bottom line.
In fact, International Paper contracted by 4% in the first quarter. Earnings fell from $360 million to $172 million over 12 months. The decline was entirely attributable to IP’s industrial packaging business which accounts for roughly 80% of sales.
It makes sense that as consumers reign in spending that fewer packages are delivered thus affecting International Paper where it hurts most. Industrial firms might slow down further in response to recent spending data.
International Paper’s free cash flow dropped from $403 million to $4 million YoY. In effect, International Paper generated almost no cash in the quarter. It had to pay $193 million to the IRS as a settlement. Even without that, it would have seen cash generation more than halve.
Foot Locker (FL)
Foot Locker, (NYSE:FL) too, is warning investors that sales have slowed and it will increase discounts to clear inventory. That means the company will see lower-than-anticipated returns for current inventory as it slashes prices.
That problem is worsened because earnings were weaker than expected. Foot Locker reported $1.93 billion in sales in the most recent quarter while Wall Street was looking for $1.99 billion.
While lower prices will drive demand higher the net result is that Foot Locker is now expected to see sales contract by as much as 8% this fiscal year. That figure previously stood at 5.5%.
If you like sneakers, the news is positive. You can go buy a new pair at a discounted price. If you’re an investor, the news is negative. The company can’t sell inventory at levels it hoped to. Further, Foot Locker is seeing an increase in theft beyond what it had expected.
On the date of publication, Alex Sirois 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.