Runaway inflation is generally considered a net negative when it comes to most measures of economic health.
It erodes purchasing power, increases market volatility, and leads to instability in prices for a whole range of essential and non-essential goods.
Furthermore, rising interest rates often accompany periods of high inflation, with governments seeking to enact policies that stymie spending and encourage saving. This further damages growth by making it more difficult for businesses and consumers to borrow money.
With monetary contraction the way it is right now, there are some stocks you’ll really want to avoid. So, while the Fed gets to work taming the macroeconomic beast, here’s our list of 5 stocks to sell while inflation is high.
Crypto Firms
Nassim Taleb once famously claimed that Bitcoin is an insufficient hedge against inflation.
Whether this is true or not, the broader digital-asset ecosystem is certainly subject to the whims and degradations of inflationary trends.
For example, several cryptocurrency stocks have been decimated in the current environment, with some enterprises – such as Three Arrows Capital – being wiped out completely this year.
In fact, the popular blockchain exchange Coinbase has seen its share price tank 83.0% throughout 2022, with many other cryptocurrency transfer operations also faring badly. Block has lost 59.6% of its value, while chip manufacturer Intel – whose application-specific integrated circuits (ASICs) are vital for Bitcoin mining – has also fallen 46.1%.
But as Bitcoin enters a period of historically low volatility, it’s hard to see where the catalyst for an industry recovery might come from. Indeed, if the FTX scandal is anything to go by, investors might soon be hiring lawyers rather than brokers in the not-too-distant future.
Travel Stocks
The travel industry has gone through many ups and downs in recent years.
In fact, one of the most disruptive forces in the sector has been the rise of Airbnb, a company that’s changed the way people book and find accommodation online.
Indeed, the rise of remote working has also impacted the hospitality business, as more people choose to work from home-based settings rather than hotels or more traditional lodgings.
On the supply side, cheaper rents and a desire for more authentic experiences have also revolutionized the sector, with an increasing number of people opting to stay in Airbnbs and other private rentals. This has had an immediate impact on the industry, making it possible for people to afford the globetrotting lifestyle and stay in nicer accommodations.
However, the hospitality industry was one of the hardest hit by the coronavirus pandemic. And, with restrictions and lockdowns in place, many hoteliers were forced to close their doors.
Furthermore, the recent rise in inflation and interest rates has dampened renewed optimism for the travel industry. Nightly rates have increased, while budgets for travel have remained relatively static. The increased cost of living has made it more difficult for people to afford necessary expenses, let alone discretionary items like travel. While there are still plenty of people willing and able to travel, the overall picture is one of decreased spending on non-essential items.
This is not good news for those companies whose fortunes are correlated with a thriving hospitality sector. In fact, with the threat of new COVID variants appearing – and uncertainty still reigning – pessimism is understandably high. Families are postponing holidays and cutting back on spending, and living costs are also weighing on consumers’ minds.
With such an unpredictable near-term outlook, investors would be wise to shun hotel stocks like Hilton and Marriott, at least for the time being.
Admittedly, some of these businesses have attractive financial metrics right now. For instance, Hilton’s gross profit margin is massive at 72.9%, while Marriott is witnessing year-on-year EBITDA growth of 111%.
That said, their valuations leave a lot to be desired. Hilton trades at a forward PE ratio of 30.4x, with Marriott’s not looking much better at 24.7x.
There are red flags everywhere for the travel industry today. And until prospects for the sector improve, you’d be better off sitting this one out.
Growth Companies and ETFs
While high inflation is often considered bad for stocks in general, it can be especially damaging for those in high-growth industries. This is because purchasing power decreases during periods of rising inflation, leading to less spending by both consumers and businesses.
Furthermore, inflation can also lead to increased volatility in share prices, making it difficult to predict where the market will go next. As such, companies in high-growth industries may find it difficult to maintain their stock price during periods of economic upheaval.
In fact, those in the science and technology space are especially vulnerable. Many tech and tech-adjacent businesses have managed extremely poorly since the onset of the financial crisis, with some very high-profile funds – such as Cathie Wood’s ARK Innovation ETF – doing particularly badly.
Indeed, a lack of diversification combined with some profoundly misguided stock picks has seen ARKK grossly underperform the S&P 500 recently. Unfortunately, the fund is over-concentrated in several holdings registering staggeringly high multiples. For example, Cathie Wood is still exposed to flops like Zoom Video Communications – her most significant investment at 8.98% – and other beaten-down names like Teladoc and Roku.
As it happens, ARKK’s experience provides an object lesson in the pitfalls of backing these “high-growth” businesses in this kind of environment. Learn from Wood’s mistake – and stick to value stocks while inflation is on the rampage.
Luxury and Non-essential Goods
It’s no surprise that spending on discretionary and non-essential goods goes down when inflation and interest rates are high.
Lower-income households are particularly vulnerable to these economic headwinds, as their actual earnings are often stagnant or declining. This can lead to a decrease in consumer confidence, which only exacerbates the problem further.
Knowing this, you might wonder why anyone would invest in a company that produces items such as jewelry or high-end furniture. But the devil’s in the details – and not all luxury goods are created equal.
For example, having gained 29.8% in value, prestige automobile manufacturer Ferrari has seen its shares beat the NYSE Composite Index over the last six months. In fact, demand for its vehicles is so high that the company has stopped taking orders for its Purosangue SUV, with waiting lists for some unlucky customers lasting as long as two years.
Yet, this isn’t the case for everyone. Signet Jewelers, the dominant player in the mid-market American jewelry business, hasn’t had the most fantastic year thus far. While its stock has fallen 26.2% in 2022, the firm’s operational efficiency hasn’t done too badly.
The company reported a robust fourth-quarter brick-and-mortar sales increase of 34.6%, with e-commerce revenues up 85.4% compared to FY 2020. Moreover, Signet trades at a low earnings multiple of 6.05x, which could be tempting for some investors.
However, the retail sector faces some short-term headwinds due to inflation, and judging how this will play out isn’t easy. As with any uncertainty regarding a potential stock pick, sometimes the best thing to do is hang fire and wait until the situation becomes a little clearer.
Brokerage Services
Falling stock prices often signal a buying opportunity, and, in general, cheaper shares usually imply greater long-term upside. Moreover, as any income investor will tell you, dividend yields are better when shares are trading low.
But if that’s the case, then brokerage firms such as Robinhood and SoFi should be flying high right now. However, that’s not the reality.
Rather, retail share-buying platforms have suffered recently, with Robinhood down more than half this year – and SoFi seeing tremendous losses to the tune of 71.6%.
Naturally, macro conditions aren’t conducive to speculative spending endeavors, especially when many would-be traders can barely make ends meet.
The so-called “meme stock” era appears to be on hiatus. Indeed, HOOD made a net loss of $175 million in the third quarter, leaving many of its shareholders wondering whether they’ll be holding on for dear life – or if better times are just around the corner.
#1 Stock For The Next 7 Days
When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.
Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.
See The #1 Stock Now >>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.