Consumers are feeling the pinch.
The Bureau of Labor Statistics (BLS) dramatically lowered June’s jobs numbers for the second time. Only 105,000 were created in the month, less than half the original 235,000 jobs that were expected. The same is anticipated for July’s numbers. So ignore the 3.8% unemployment rate, which also just ticked higher.
Inflation is also on the rise. After 12 months of contraction, inflation is estimated to have accelerated to 3.3% in July, up from June’s 3% rate. That’s heading in the wrong direction from the Fed’s 2% target rate.
But the biggest challenge may be student loans. After a three-year hiatus due to the pandemic, borrowers have to begin repaying their obligations again. Unfortunately, they didn’t use the reprieve to save money. The Federal Reserve says the national personal savings rate shrunk to just 3.5% in July. That’s one of the worst levels since the financial crisis of the mid-2000’s and far below the 10% rate of the 1980s.
With consumer wallets about to severely tighten, here are three stocks to sell before the situation worsens.
Carvana (CVNA)
It’s ludicrous for the stock of online used car dealer Carvana (NYSE:CVNA) to be up 950% in 2023. The dealer sold 35% fewer cars in the second quarter than it did a year ago and it perennially loses money on every car sold.
Because Carvana finances most of the cars it sells, it carries substantial risk if consumers can’t pay their loans. As many as 80% of its customers finance the purchase through the dealer. In addition, the Federal Deposit Insurance Corp (FDIC) says defaults on car loans jumped above pre-pandemic levels to over 2%.
With interests rates higher now than a year ago due to Federal Reserve policies, it makes buying a car more expensive. Also, used car prices remain elevated. Car industry site Edmunds points out the average cost of a used car was $29,472. While that’s down 4.6% from last year’s record high of $30,905, it is still 46% greater than the pre-pandemic price of $20,153.
Far fewer people want to buy a new or used car. Carvana’s sales report makes that evident. Although it recently completed a debt exchange, the online used car dealer is still in trouble. It may have staved off bankruptcy for the moment, but especially after its meteoric rise, Carvana is a stock to sell.
Annaly Capital Management (NLY)
Real estate investment trust (REIT) Annaly Capital Management (NYSE:NLY) is another stock to release. As mortgage rates climb, home sales are falling.
Existing home sales dropped 2.2% in July and tumbled nearly 17% from last year. Yet housing prices continue rising with the median existing-home sales price hitting $406,700. While the Fed may pause its money-tightening program, the market is making it difficult for mortgage companies to thrive.
Mortgage REITs (mREIT) like Annaly Capital Management, which is the largest by market cap, will feel the impact most. Net interest spread is the difference between the interest rate Annaly earns on its assets and the rate it pays on borrowings. The ratio turned negative for Annaly last quarter, -0.73%, compared to a positive 2.46% last year.
Another important metric for mREITs is the constant pre-payment rate (CPR). It measures the percentage of Annaly’s portfolio that’s expected to be paid off within a year. A lower number is better because when a homeowner pays off his mortgage, it no longer produces interest for the loan’s holder. That, in turn, can lead to lower rates of return.
While Annaly’s CPR markedly improved from last year, dropping to 7% from over 14%, the projected long-term CPR grew to 8.6% from 7.7%. At least this area should stabilize for Annaly. Existing homeowners are less likely to refinance their low-interest mortgages for new, higher rate ones. But with housing likely to be a trouble spot for the economy, Annaly Capital Management is a stock to avoid.
Nikola (NKLA)
In the middle of Nikola‘s (NASDAQ:NKLA) massive runup in July, investors were advised to sell the stock and not look back.
Shares of the truck maker tumbled and now trade for just over $1 per share. That’s a loss of two thirds of its value, and it could fall even further.
Last month Nikola issued a recall for each battery EV (BEV) it has ever delivered because of potential for fire. After the battery fires, Nikola tried suggesting arson was the root cause, but subsequently admitted it was a coolant leak due to internal manufacturing problems. It then suspended sales of any new BEV. The recall could hurt Nikola’s ability to deliver on fuel cell-powered EVs.
It also raises questions about Nikola’s truthfulness again. NKLA has history of misleading investors and burning its reputation. Founder Trevor Martin is awaiting sentencing on three fraud charges related to the truck maker’s accomplishments. The electric truck and hydrogen maker also brought on its fourth CEO in four years.
Nikola stock is clearly not a great pick for the foreseeable future. If you still have shares in your portfolio, now is a good time to cut your losses and sell.
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.
