Stocks To Avoid Right Now: March 2020 was a dramatic month for the world economy – one that history will remember alongside the market crashes of 1929, 1987, and 2008.
Massive sell-offs sparked talk that the next Great Depression was looming. That, in addition to widespread business closures and massive unemployment figures, had investors feeling quite bearish indeed.
The good news is that many companies are already showing signs of recovery, and it appears that most have a solid go-forward strategy for generating revenue as the pandemic drags on. However, some businesses and industries have greater challenges than others, which means they are less likely to create value for shareholders in the near-term.
These are five stocks (and industries) to avoid right now:
Are Cruise Lines Washed Up?
When the Cruise Lines International Association (CLIA) published its 2020 industry outlook report in December 2019, all signs pointed to a strong year.
Various lines expected to welcome more than 32 million passengers from January through December, thanks to the efforts of roughly 1,177,000 employees worldwide.
In fact, growth in demand for cruises had many lines expanding their fleets, and CLIA members announced 19 new ships scheduled for maiden voyages in 2020. Unfortunately, the novel coronavirus dramatically altered the industry’s outlook.
Cruise ships were early virus hotspots, with passengers falling ill and dying at frightening rates. Some vessels were unable to find a port willing to allow passengers to disembark for weeks, and others were blamed by citizens and governments of receiving cities for spreading the virus to locations where there had been few or no cases.
Major cruise lines voluntarily suspended operations, and the US CDC prohibited cruise ships from operating in US waters beginning April 9th. As the majority of global cruise passengers are from the United States, this drastically limits the industry’s ability to resume operations until the CDC order is lifted.
Most cruise lines have tentatively started accepting reservations for August 2020 and beyond, but there is no guarantee that this will take place as planned. Even if it does, cruise lines will be in dire financial straits for the foreseeable future, as they attempt to attract skittish vacationers with deep discounts.
Amusement Parks May Be Deserted For Some Time
When economic uncertainty and unemployment are top of mind, many families make drastic cuts to their discretionary spending.
One of the first things to go is travel and entertainment, which includes day trips to amusement and theme parks.
Those that aren’t facing financial concerns are still unable to visit these attractions, as a majority have closed until the COVID-19 crisis passes.
When it is safe to resume operations, analysts are concerned that the industry might not bounce back right away. For the moment, many prospective patrons are still uncomfortable in crowds, and it is unclear whether amusement parks will be as appealing when social distancing, masks, and other safety measures are required.
With that in mind, summer 2020 isn’t expected to be a good one for the amusement park industry, and it is possible that some won’t be able to survive the loss of a year’s peak season. That means amusement park stocks should remain on the no-buy list for now. Examples include Six Flags, Sea World, and Cedar Fair.
A possible exception to this recommendation is the Walt Disney Company. Unlike its theme and amusement park peers, Disney has a variety of revenue streams to rely on despite closure of its parks and resorts.
Rental Car Companies = Sound Of Crickets
Most businesses have clamped down on all non-essential travel, and they have taken to substituting video conferences for in-person meetings.
While this was initially a safety measure in light of the pandemic, it is clear that many are rethinking their travel policies for the long-term.
After all, a majority of employees have become accustomed to virtual work, and there is significant cost-savings associated with video conferencing versus on-site visits. That’s bad news for all travel-related industries, including airlines, hotels, and rental car services.
When coupled with the decline in leisure travel, and the fact that it is unlikely people will jump right back into old habits once the threat of COVID-19 exposure dies down, the rental car industry doesn’t have a strong outlook in coming months – and maybe longer.
This is made worse by the fact that these companies tend to have a high debt-to-cash ratio, which puts them in a precarious financial position.
Movie Theaters Are Scary Investments
The plight of movie theaters is perhaps one of the most heartbreaking. Going to the movies has long been a great American pastime.
However, these venues are facing serious competition from streaming services, and they have been scrambling to stay relevant in a rapidly changing entertainment and media market.
With that said, the industry was seeing some growth before the COVID-19 crisis, but much of that has been erased in recent months.
As non-essential businesses, movie theaters were some of the first venues to close when the pandemic started, and so they have experienced the same financial disruption as their other non-essential peers.
However, unlike other industries, movie theaters have special challenges. They rely on their exclusive ability to show new films, attracting audiences who can’t wait for a streaming or on-demand version.
Unfortunately, in these unprecedented times, film producers looked to recoup some of their own costs. They elected to release certain blockbusters directly to home viewing, bypassing theaters altogether.
The loss of ability to show these films exclusively is a devastating blow to movie theaters, as they were expected to bring in much-needed revenue when theaters reopen.
Though some potential hits are still being held back until they can be seen in theaters, the remaining few may not be enough to keep all movie theater companies afloat.
Will Mall Operators Go Bust?
Finally, mall operators are in a difficult position these days, and it isn’t just because of the pandemic. Traditional brick-and-mortar retail stores were already struggling before COVID-19.
Now that they have had to close for extended periods, many are unable to pay their rent – and it is unclear whether they will receive the type of extensive financial support from government sources necessary to recover once they are cleared to reopen.
This puts mall operators in a tricky spot, because fixed costs don’t change regardless of the current state of the economy. If enough retailers stop paying rent, mall operators may find themselves completely insolvent.
The bottom line is that while the economy is recovering from the drastic declines of March 2020, certain industries will take longer than others to return to their pre-March 2020 profitability. That means adding these stocks to your portfolio carries more than the usual amount of risk.
With that said, some investors are taking a long view of the situation. They are choosing to purchase shares of these high-risk companies at deep discounts now, with the intention of holding them for several years. This strategy may pay off handsomely for those that have the means and ability to wait patiently.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.