Deciding on which stocks to sell before a bubble burst depends on first defining where bubbles exist. That’s difficult to predict as the U.S. economy continues to confound even the best economic minds. That’s not to say there aren’t high-risk bubble stocks to sell. There are. In fact, despite positive signs, bubbles continue to exist everywhere. Macroeconomic factors suggest the U.S. economy is not healthy overall. U.S. debt remains sky-high at the government level. The deficit is growing and recent theatrics in Congress haven’t changed anything for the better. In addition, bubbles extend to credit card debt, car loan debt, student loan debt, the housing market, the commercial real estate market, and tech stocks that have propped up a surging stock market. A severe recession remains entirely possible. Whether that occurs or not it makes sense to drop riskier stocks currently.
High-Risk Bubble Stocks: Wells Fargo (WFC)
Investors should seriously consider dropping Wells Fargo (NYSE:WFC). Trust in banks has taken a hit in 2023. Among big banks, only JPMorgan Chase (NYSE:JPM) has been spared in 2023. That’s largely due to its size and the leading role it played when regional banks collapsed months earlier.
The point here is that Wells Fargo was already suffering a lack of trust prior to the most recent meltdown. The company already got caught for creating fake accounts in order to make its operations appear stronger than they were. It’s a wild and concerning thing to do for any bank, especially one of the largest in the U.S. The bank was trying to put that scandal behind it. It clearly did a poor job as it recently was fined $1 billion for overstating its progress in cleaning up that scandal.
I believe it’s fair to state that Wells Fargo is not a trustworthy bank at this point. Given that you shouldn’t inherently trust banks overall, that’s probably saying something. Again, consider Wells Fargo a high-risk bubble stock to sell now.
High-Risk Bubble Stocks: Regions Financial (RF)
Regions Financial (NYSE:RF) is a regional bank and stock that offers a catch-22 in terms of investing. It’s also another high-risk bubble stock to sell. The company appears to be doing well based on its first-quarter results. Earnings are up, revenues increased by 22%, and it seems to be heading toward a better place. That’s the magic of increased interest rates that increase net interest income.
Regions Financial serves the southeast, deep south, and midwest. But it is most concentrated across Tennessee, Mississippi, Alabama, Georgia, and Florida. Florida, Mississippi, Alabama, and Georgia all happen to be among the states that struggle the most with credit card debt. So, with credit card debt above $1 trillion and a clear bubble at hand, Regions Financial is at risk.
Commercial real estate and mortgage loans make up roughly one-third of its outstanding loans. Those are bubbles of their own. The overall picture for RF stock is a high-risk bank exposed to serious bubbles that continue to brew.
High-Risk Bubble Stocks: SoFi Technologies (SOFI)
The clearest reason to sell SoFi Technologies (NASDAQ:SOFI) stock today is simply that it has gotten too hot, too quickly. The stock was one of the big winners to emerge from the debt ceiling deal. That deal set a clear date for the resumption of federal student loan payments. SoFi Technologies, which holds significant student loans, is a clear beneficiary of the deal then.
Share prices basically doubled due to the discussions and deal. So, investors should sell it in order to simply capture their profit. But that’s not really why I’m bearish on SOFI stock. Instead, I believe that SoFi Technologies now suffers from the real risk that the restart of repayments won’t be as strong as analysts believe.
There’s a very real risk that strained student loan holders will default in record numbers in the coming months. They were already defaulting at record rates prior to the pause. They have less money now than they did then so it only makes sense that things are going t get worse.
Vornado Realty Trust (VNO)
I’ve written about Vornado Realty Trust (NYSE:VNO) as a stock to avoid several times recently. I continue to believe it should be avoided today. The commercial real estate firm is heavily concentrated across office spaces in New York, Chicago, and San Francisco. It should be high on any list of commercial real estate bubble stocks. Vornado Realty Trust has postponed dividend payments until the end of 2023. REIT stocks use high-yield dividends to lure investors. When they pay things are great. It was paying a very high 11%. That income now no longer exists.
In the first quarter, Vornado’s net income was five-fold. San Francisco has recently been in the headlines as hotels close after failing to make payments. Cracks are emerging in the commercial real estate sector. Vornado’s markets also suffer from being in geographies in which workers have much more sway. Return-to-office mandates aren’t going to go over well in San Francisco, New York, and Chicago. It all spells continued trouble and bigger losses.
Nvidia (NVDA)
If there is a single tech stock at the most risk, Nvidia (NASDAQ:NVDA) has to be it. The emergence of AI has catalyzed a recent surge across the tech industry. That surge has been powerful enough to raise markets overall, accounting for a great percentage of overall market gains of late.
Nvidia’s chips have emerged to be a keystone to the generative AI progress that promises to rapidly increase productivity and revenues along with it. The firm’s huge Q1 earnings release and second-quarter guidance took it from a potential AI champion to the clear winner.
Concerns of an AI bubble cropped up as soon as earnings were released. They died down and NVDA shares jumped higher again.
I’m not saying investors should dump Nvidia now. I have no way to accurately say it’s going to cool off. Honestly, I thought it would stay at $390 but I was wrong. It’s now at $430. Yet, more and more bears are emerging drawing comparisons between AI and the Dot com bubble. It’s almost moot to say take profits now. I’m sure most readers will have done that if they’ve been lucky enough to buy it months ago. Yet, it’s fair to warn that buying in now is clearly risky.
Armour Residential REIT (ARR)
Armour Residential REIT’s (NYSE:ARR) price chart tells investors a great deal about the stock. Inflation concerns that cropped up in late 2021 and culminated in rate hikes beginning in March of 2022 correlate nicely with its arc.
Share prices have more than halved since then. Funnily enough, the company was arguably doing worse prior to Fed rate hikes. Its net loss in the first quarter of 2022 totaled $66.43 million. It narrowed to $34.35 million in the first quarter of this year. That was mostly on account of securities trading discrepancies during those two respective periods.
Net interest income dropped by a factor of three. That means interest rate increases are hurting the firm. What’s particularly troublesome is that the company almost brags about raising $181 million in capital by issuing 30 million new shares in the first quarter. There are only 190 million in total. That should be dilutive. The dividend yielding 18.4% is a siren song that investors should avoid. Vornado Realty Trust, just above, should tell investors all they need to know in that regard.
UBS Group (UBS)
UBS Group (NYSE:UBS) emerged as a winner as U.S. regional bank meltdown contagion spread to Europe and claimed Credit Suisse. UBS was forced to save Credit Suisse by regulators. It initially bristled at the prospect of doing so but the result is that there is no one single European money manager for the global elite.
The forced merger will result in tens of thousands of jobs lost as UBS sheds Credit Suisse employees in the aftermath. As sympathetic as I am to them, that’s no reason to suggest it’s time to sell UBS. Frankly, it should benefit share prices due to the implied increase in efficiency.
The reason is that it isn’t a well-run bank despite its association with the global elite and a previously untouchable Swiss banking sector. Multiple financial metrics indicate real distress. In particular, UBS’ equity-to-asset ratio is very weak. The lower the ratio, the more likely a bank is to be reliant on debt financing. UBS’ ratio is worse than 9 out of 10 banks. Further, it simply doesn’t create value as revealed by a return on investment of 0%.
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.
