We’re starting to see signs of a recession on the horizon, and while that doesn’t mean you should exit the market altogether, there are some stocks to sell now. Tough economic conditions are likely to sting the bulk of the market. Business costs will be rising just as demand starts to tail off. Meanwhile servicing debt has become a lot more expensive. Companies with precarious financials will struggle to make ends meet.
There are some reliable truths about recessionary periods that investors can use to their advantage. The first is that a drop in economic activity means a drop in energy prices. This is less than ideal for the big energy firms that have been turning in bumper profits recently, and could see their shares reverse course as investors search for safety. Another part of the market that tends to struggle in an economic downturn is consumer goods. We tend to see consumers slide down the value chain when they’re watching their pennies. That means generic and supermarket own-brands have more appeal, and the more expensive, branded products lose their luster. With that in mind lets take a look at three stocks to sell now.
BP (BP)
BP (NYSE:BP) has been flying high with record profits thanks to sky-high oil prices, but as the tides turn it’s one of the top stocks to sell now. Profits have started to come back down to earth as oil prices tick lower, and the group warned that refining margins industry wide are starting to crumble in its latest earnings release. That’s not to say BP is going out of business, but the oil titan will have to navigate choppier waters ahead which could see investors start to lose interest.
On top of the more challenging conditions, BP is suffering from somewhat of an identity crisis after walking back its ambitious net zero goals. The group had positioned itself as a leader among the oil majors in the energy transition, but as oil prices rose BP tiptoed away from this title. The company pivoted to saying it now believes higher oil output is necessary for an “orderly transition.” The result was a lot of angry investors, and a lot of scrutiny. BP has lost its shine as a purveyor of black gold, and its position as a net zero champion is also very much in question, leaving the investment case for BP rather unattractive.
Clorox (CLX)
Clorox (NYSE:CLX) has fallen firmly off the pandemic cliff, and it is now another atop the list of stocks to sell now. The group’s namesake disinfectants flew off the shelves throughout the pandemic, and even continued to experience elevated demand for sometime afterward as we continued to worry about illness and germs.
Now the tables have turned and the group is struggling to claw back investors’ attention. That is because not only did demand evaporate post-pandemic, but input costs rose at the same time. That meant Clorox was in the difficult position of having to decide whether to raise prices and pass those costs onto its already fragile consumer, or stomach them itself and slice its margins. The result was a near double-digit decline in profitability.
Some say the worst is over for Clorox, but ultimately it may never recover to its former glory. On top of the operational challenges it’s facing, the group is also up against tough competition from unbranded, generic products. Once customers switch, it could be very difficult to win them back.
Dick’s Sporting Goods (DKS)
There is no question that sporting goods have been in high demand over the past few years as more people look to get in shape and athleisure gains traction. However, a recession will see consumers strapped for cash, and fishing poles and workout gear will likely be rubbed off the shopping list. That is a problem for Dick’s Sporting Goods (NYSE:DKS), where margins are already thin and competition is a serious concern.
There is very little keeping people from choosing another sporting goods store, or even buying direct from a specific brand. So Dick’s customers are relatively price-sensitive. That’s a bad thing in an inflationary environment, because its much harder to pass on higher costs. On the supply side the group is facing similar problems. There’s nothing keeping key vendors from inking more lucrative deals with other retailers, or pushing their own direct to consumer channels instead. In an economic downturn everyone will be looking to do more with less, and that could leave Dick’s simply with less.
On the date of publication, Marie Brodbeck did not hold (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.
