Since the pandemic onset, student loan payments have paused, with interest rates at 0%. However, these payments will restart in late August, affecting consumer spending. This has led to the rise of stocks to avoid when loan payments resume.
Student loan borrowers will face increased monthly expenses. Some may need to reduce spending, impacting certain industries more than others.
Essential spending will continue, but discretionary spending may suffer with the resumption of student loan payments. These three stocks could experience volatility when payments restart in August.
Target (TGT)
Target (NYSE:TGT) has been shaky over the past year, with FY 2022 revenue only growing by 2.9% from 2021. Net income also dropped substantially, down 60% year-over-year. High inflation and supply gluts hurt the company’s profits, and student loan payments can create more issuers for the retailer.
Target’s exposure to discretionary spending also makes it vulnerable. Target customers spent nearly $55 billion on discretionary products in 2022. That figure represents more than half of Target’s 2022 revenue, which was $107.588 billion. This makes it one of those stocks to avoid when loan payments resume.
Another hint that tips off Target’s precarious situation is the firm’s recent dividend hike. The company recently increased its quarterly dividend from $1.08 to $1.10 per share, representing a 1.9% increase. This dividend hike is much lower than the 20% dividend hike in 2022 and the 32.3% hike in 2021.
Even in the midst of the pandemic, Target raised its dividend by 3%, which is higher than the most recent dividend hike. This dramatic and sudden deceleration suggests Target knows the upcoming quarters may not be as good as prior quarters.
Nike (NKE)
Nike’s (NYSE:NKE) underlying business is in better shape than Target’s. The footwear and apparel company reported double-digit revenue growth in the first quarter, but net income decreased by more than 10%. The company’s dividend growth has been relatively normal, but its next dividend hike is expected to take place for the dividend payment due in December.
The company’s P/E ratio of 31 is on the slightly high end, given the company’s historical P/E ratio trend. While the ratio is feasible for now, that valuation can come under pressure if the company reports additional quarters of year-over-year declines in net income.
The renewal of student loan payments can create that catalyst as more borrowers grapple with extra monthly payments and inflation that remains higher than the benchmark.
Another problem for the retailer is its rising inventory. If the company has too much inventory and not enough demand for its products, the retailer may have to sell its products at discounts. While iconic products under the Nike brand will likely maintain their high prices, other products may get discounted as high inventory and fewer consumers creates a deflationary effect on prices.
Airbnb (ABNB)
Airbnb (NASDAQ:ABNB) is a profitable tech company that connects hosts and guests. The company made the hotel model more accessible to property owners while making fees from every transaction. The company reported its first profitable year in 2022 and continued on a strong note to start the New Year. Airbnb enjoyed a 20% year-over-year revenue increase in the first quarter and reported a net income jump of over 700% year-over-year.
The company seems to be in a good place and even has a respectable forward P/E of 35, given the recent net income growth. However, consumers may have to cut their travel spending when student loan payments resume. That means fewer people using Airbnb, especially with summer coming to an end by that point.
One thing working in Airbnb’s favor is that the company can see new hosts join the platform as more people look for extra side hustles. However, if too many listings get added to the platform and there is not enough demand, hosts may be forced to maintain or lower their prices.
Airbnb has flipped the switch since falling by over 60% from peak to trough and is up by over 45% year-to-date. The company’s long-term prospects have improved, but it can experience turbulence after August, with discretionary spending set to take a hit.
On this date of publication, Marc Guberti 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.
