These are great stocks to sell ahead of the Federal Reserve’s aggressive monetary tightening policy.
Globalstar (GSAT): High debt, a profitless business and elevated metrics make this global satellite firm a sell in a rising interest rate environment.
Wynn Resorts (WYNN): The debt burden of the casino operator and lifting interest rates will make debt refinancing pricier, pressuring its stock.
Bed & Bath and Beyond (BBBY): With net loss expected to accelerate this year, the dip of this overly leveraged retailer is unlikely to stop with the Fed’s monetary tightening.
Citrix Systems (CTXS): Flattening revenues and deteriorating profitability are bearish catalysts for this highly valued tech specialist.
GoDaddy (GDDY): Elevated debt and valuation multiples puts pressure on the tech stock.
Apollo Commercial Real Estate (ARI): Lifting interest rates are expected to squeeze the profitability of this mortgage REIT.
Hannon Armstrong Sustainable Infrastructure Capital (HASI): Overstretched valuation metrics and rising debt are bearish catalysts for the renewable investment firm.
Equity markets can be highly volatile when monetary policy shifts from one regime to another. Last week, the Federal Reserve raised its benchmark policy rate by 50 basis points, a particularly aggressive tightening measure aimed at containing inflation, which is at 40 years high. This move has triggered wild moves in the equity market. Worried investors might be wondering what stocks to sell before the Fed gets too aggressive.
Equities tend to perform poorly during high and rising inflation environments, but some sectors are more affected by rising interest rates than others. For instance, consumer discretionary stocks, tech stocks and mortgage real estate investment trusts (REITs) are more inclined to lag market performance, whereas energy stocks, equity REITs and consumer staples stocks are better hedges against inflation.
With high inflation persisting and interest rates expected to continue to increase, here is a selection of stocks to sell before the Fed tightens benchmark policy rates further.
Bed & Bath and Beyond
Apollo Commercial Real Estate
Hannon Armstrong Sustainable Infrastructure Capital
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Globalstar (NYSEAMERICAN:GSAT) provides voice and data communication services through its global satellite network and active ground stations. GSAT stock reached a high of $2.78 per share in September 2021, but since then the stock lost 60% to $1.10 per share at the start of May 9.
So far this year, the stock is down by 9%. The weak fundamentals of the company and its high debt will continue to pressure its valuation.
Net sales of the satellite communication specialist are forecasted to remain flat in the next two years at approximately $125 million, whereas net loss is expected to reach $102 million per year. More worryingly, Globalstar had a net debt of $224 million at the end of 2021, representing an elevated leverage ratio of 5.78. The company is also estimated to generate negative free cash flow in 2022 and 2023, pressuring GSAT stock even more.
Rising interest rates will hurt GSAT’s profitless business even more, and investors should avoid this stock for the moment.
Wynn Resorts (WYNN)
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Wynn Resorts (NASDAQ:WYNN) is one of the leading American promoters and operators of hotels and casinos. WYNN stock has dipped 43% in the past year and is down 27% year-to-date to $64.83 per share as the unprofitable business looks to sell assets to improve its balance sheet.
The casino specialist has a five-year beta of 2.2, indicating that the stock is outpacing the moves of the stock market. After delivering a net loss of $756 million in 2021, WYNN’s yearly loss is expected to shrink to $216 million this year. Nevertheless, WYNN’s debt burden is expected to continue to weigh on its stock. Net debt reached $9.4 billion in 2021, representing a leverage ratio of 16.5. The company announced in February 2022 that it is looking to sell a part of its Encore Boston Harbor real estate assets in exchange for $1.7 billion in cash.
While this announcement should enhance WYNN’s balance sheet, it will not be enough to reduce debt to sustainable levels, and higher interest rates will make debt refinancing pricier, bringing additional headwinds to WYNN stock.
Bed & Bath and Beyond (BBBY)
Bed & Bath and Beyond (NASDAQ:BBBY) is an American omnichannel retailer offering an assortment of merchandise in the home, baby, beauty and wellness markets. BBBY stock is down 56% in the past year and 24% since the beginning of the year to $11.75 per share, partially due to sluggish demand for its products. The company had this to say in its Q4 2022 earnings report:
“Macroeconomic factors, such as the disruption of the global supply chain, the Omicron variant, as well as the geopolitical turbulence weighing on consumer confidence, have uncovered more vulnerabilities than we could have foreseen at this stage of our transformation, as we completely rebuild the foundation of our business.”
After an unhelpful fiscal year, net sales are expected to drop by 7.8%. On the other side, the company is projected to remain profitless, though its net loss is expected to slow from $560 million to $237 million.
In terms of the balance sheet, BBBY’s net debt is estimated to advance to $1.1 billion this year, representing a leverage ratio of 19.3, which is unproductive in a climbing interest rate environment.
With fundamentals deteriorating, BBBY stock should continue to be pressured in the next quarters. Bed, Bath and Beyond has also a high 5-year beta of 1.8 and an elevated price-to-book ratio of 7.61, indicating that downward speculative bets will most probably intensify.
Citrix Systems (CTXS)
Citrix Systems (NASDAQ:CTXS) is a provider of cloud services for infrastructure access. CTXS stock has plunged 17% in the past year, but the tech stock has outperformed the market year-to-date delivering a performance of 6% to $100.62 per share.
However, Citrix Systems’ top-line growth is projected to flatten this year and the valuation of the tech company is overstretched. CTXS’ revenues are expected to advance by only 3.2% this year to $3.32 billion, and net profit should settle at $308 million this year. While the IT infrastructure specialist offers an estimated double-digit net profit margin of 9.27% in 2022, the leverage ratio of the company is expected to advance to 2.51 this year.
More worryingly, CTXS stock trades at a forward price-to-earnings ratio of 54 and an elevated price-to-book ratio of 16. Analysts are neutral on the equity story, offering an average price of $104 per share, representing a small upside of 4% in the next twelve months.
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GoDaddy (NYSE:GDDY) provides domain name management and web hosting services. Since the beginning of the year, GDDY stock has lost 9% to $75.59 per share at the start of May 9 amid a complicated environment for tech stocks.
Despite its growth resilience, GoDaddy’s elevated debt and valuation metrics put pressure on the tech stock. After growing 15% to $3.82 billion in 2021, net sales growth is expected to slow down. Revenue is expected to increase 9% year-on-year to $4.15 billion by the end of 2022. Net income, however, is projected to jump 58% to $382 million, offering an estimated net margin of 9.2% on the year.
On the negative side, GDDY had a net debt of $2.6 billion at the end of the year, representing a leverage ratio of 3.07.
Apollo Commercial Real Estate (ARI)
Source: Vitalii Vodolazskyi / Shutterstock
Apollo Commercial Real Estate (NYSE:ARI) is a real estate investment trust (REIT) originating and managing first mortgage loans, subordinate financings and other commercial real estate-related debt investments. ARI stock has outperformed the equity market year-to-date, down 5.5% on the period to $12.31 per share, but it has lost 22% in the past year.
The mortgage REIT’s revenues are expected to decrease moderately this year, down 8.8% year-on-year to $260 million, whereas net profit is estimated to plunge 35.5% to $136 million, though with a comfortable profit margin of 52.5% on the year. Lifting interest rates are expected to squeeze the mortgage REIT’s profitability. Indeed, variation in interest rate directly affects net interest margins, reducing interest income and increasing funding costs.
That being said, Apollo exchanges at a fair value, posting a forward P/B ratio of 0.85 and a P/E ratio of 12.5. The company is also expected to deliver a double-digit dividend yield of 11% in 2022. Yet with interest rates expected to rise in the next quarters, analysts give ARI a hold rating, with a limited upside of 9%, corresponding to an average target price of $13 per share.
Hannon Armstrong Sustainable Infrastructure Capital (HASI)
Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) is a REIT focused on making investments in climate solutions and sustainable infrastructure markets. HASI stock has lost 20% in the past year and has plunged 27% to $38.56 per share since the beginning of the year.
Hannon derives 50% of its revenue from the interest on its investments, or the spread between interest income on mortgage assets and funding costs. In Q1 2022, interest expenses decreased 3% due to a debt extinguishment expense in 2021 that was partly offset by higher interest costs and rising debt. Net debt is expected to reach $2.75 billion this year, up 21% year on the year and advance by another 3.5% in 2023 to $2.84 billion.
While this expansion will provide additional opportunities for the company, HASI’s profitability should be hit by higher interest rates, putting it on the list of stocks to sell ahead of Fed’s aggressive monetary tightening. After reaching an elevated level of 138% in 2021, net profit margins are estimated to slow to 113% this year, which should continue to pressure HASI stock. Hannon’s overstretched forward P/B ratio of 2.05 and P/E ratio of 28 are additional bearish catalysts for the renewable investment firm.
On the date of publication, Cristian Docan 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.
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