Looking at the stock market today, smart investors know there are just some stocks to avoid in July. The S&P 500 sits only 6% below the all-time high it hit to kick off 2023. Even though there are predictions of painful economic hardship just over the horizon, investors keep pushing the market to new heights.
Now I wouldn’t recommend shorting stocks. As economist John Maynard Keynes once noted, the market can “remain irrational far longer than you or I can remain solvent.” I wouldn’t be jumping in either. For my money, the following three companies are the worst stocks to buy this month.
Annaly Capital Management (NLY)
The first stock I’d avoid this month is real estate investment trust (REIT) Annaly Capital Management (NYSE:NLY). The bloom is off the rose of the housing market. Rising interest rates are hitting the mortgage industry hard.
Although Annaly doesn’t originate mortgages, higher rates negatively impact its ability to buy and sell mortgages at a profit. Mortgage REITs like Annaly take out short-term low-interest rate loans and lend out the money at higher long-term rates.
The company primarily buys mortgage-backed securities (MBS) backed by the full faith and credit of the U.S. government. Even if the borrower doesn’t repay the loan, the federal government ensures the investor gets the principal and interest owed.
The problem is that although there is no credit risk, MBSs can still fall in value — sometimes dramatically, as we saw with Silicon Valley Bank. The institution didn’t hedge against values falling so low. While Annaly does hedge its investments, its values still dropped precipitously last year. MBSs badly underperformed U.S. Treasuries as the Federal Reserve raised rates. Annaly’s financial performance was also severely hurt, causing the company to cut its dividend.
According to the Fed, the average 30-year mortgage carries a 6.96% interest rate, up from 5.51% one year ago and 2.88% in 2021. Annaly Capital’s dividend yield is 13%, which could attract investors, but the pressure on interests will only continue to build. That means the dividend may be cut again.
Affirm Holdings (AFRM)
Another financial stock getting hurt by our high-interest rate environment is the buy now, pay later (BNPL) specialist Affirm Holdings (NASDAQ:AFRM). Affirm levels the playing field for small and medium-sized businesses against their larger brethren. For a fee, merchants can offer their customers 0% short-term financing. That’s an especially attractive option for big-ticket items. It also offers high-rate options on longer-term loans.
Connected fitness firm Peloton Interactive (NASDAQ:PTON) was Affirm’s biggest customer last year, accounting for 8% of total revenue. During the pandemic, Peloton’s pricey equipment sold out quickly, but after the crisis ended, sales cratered.
Although gross merchandise volume was up 18% to $4.6 billion year-over-year in its fiscal third quarter, Affirm’s net losses nearly quadrupled to $201 million. Interest rates on its longer-term loans can run between 30% and 36%, a usurious level compared even to credit cards. A customer willing to accept a 36% interest rate to make a purchase is at risk for potential default.
While the vast majority of Affirm’s loans are non-delinquent, it is seeing a rise in delinquencies in 60- and 90-day past-due loans. With high-interest rates likely to be with us for some time, Affirm itself is a high-risk stock to buy in July.
Nikola (NKLA)
The other day, electric truck maker Nikola (NASDAQ:NKLA) enjoyed a massive 60% run-up of its stock. The company announced it was entering into a supply agreement with hydrogen provider BayoTech, Inc. In exchange for acquiring as many as 10 HyFill transport trailers to assist with vehicle fueling, BayoTech agreed to buy up to 50 Nikola Class 8 hydrogen fuel cell electric vehicles. The stock also previously delivered some promising production and delivery numbers for its trucks for the second quarter.
Despite the gains, the stock is down over 95% from its early pandemic highs. A history of misleading investors and scandals has tarnished its brand. For example, its founder was convicted of securities and wire fraud last year. However, Nikola has new management and could be thought of as a different company today.
By focusing on the truck market, Nikola hoped to fill a niche in the electric vehicle (EV) industry that was largely being ignored. Now it needs to come through on its promises. The company has to deliver what it has said it could: hundreds of new battery EVs, its first hydrogen fuel cell EV and a new network of charging stations. Because Nikola is short on cash, that could be a problem. It was forced to move a stock sale vote back a month under investor pressure. It also needs to fend off new competition from Tesla (NASDAQ:TSLA). The leading EV maker delivered its first EV semi trucks last year.
Until Nikola can prove that it’s up to the task, this company should be considered a highly unstable stock in July.
On the date of publication, Rich Duprey 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.
