7 S&P 500 Stocks to Consider Shedding in September Amidst Growing Economic Uncertainty
Throughout the year, the S&P 500 and various other leading market indices have displayed remarkable strength. However, due to factors such as interest rates, Federal Reserve actions, and mounting concerns about a potential recession, there are signs of vulnerability. According to Forbes, the possibility of a recession in the first half of 2024, or perhaps even later this year, is looming on the horizon. While this isn’t the news anyone wants to hear, it’s essential to acknowledge the potential risks. Consequently, it may be wise to safeguard your investment portfolios, and one way to do so is by reconsidering your holdings, including these prominent S&P 500 stocks that may be worth divesting.
- Royal Caribbean Group (RCL)
In July, Royal Caribbean Group reported robust revenues of $3.5 billion, marking a significant 61% increase year-over-year. The company also posted an impressive operating income gain of $772 million compared to an operating loss of $219 million in the previous year. Demand for the company’s services remains strong, and there’s optimism for substantial passenger volume growth in the cruise industry. While this could potentially result in double-digit growth for Royal Caribbean, the company is grappling with a significant debt burden. By the end of the second quarter, its long-term debt exceeded $18.7 billion, with $1.7 billion of that due within a year, all carrying high-interest rates. Moreover, the need to repay at least $2 billion in loans annually from 2023 to 2027, which must be funded by free cash flow, poses challenges given the company’s historical free cash flow track record.
- PulteGroup Inc. (PHM)
The housing market has been facing headwinds due to rising interest rates, with mortgage rates reaching levels not seen in two decades. While housing stocks like PulteGroup have performed well, surging interest rates and the reluctance of homeowners with low-rate mortgages to sell their properties and acquire new ones with higher mortgage rates could dampen the sector’s prospects. PulteGroup’s shares have soared by 103% over the past year, but this bullish trend may not be sustainable in the face of persistent high-interest rates. Investors should consider taking profits in PHM before potential headwinds take their toll.
- Advanced Micro Devices Inc. (AMD)
Although Advanced Micro Devices has gained popularity in the semiconductor sector, particularly in artificial intelligence (AI), it remains one of the S&P 500 stocks that might be worth shedding. While AMD is viewed as a formidable competitor to Nvidia in the AI arena, it faces an uphill battle against Nvidia’s significant lead in AI technology, as highlighted by CNBC. Unlike Nvidia, AMD has not yet translated its AI ambitions into substantial profits. Despite a 70% year-to-date rally, AMD’s earnings results have shown weakness, making the stock appear considerably risky.
- Old Dominion Freight Line Inc. (ODFL)
Old Dominion Freight Line, a leading Less-than-Truckload (LTL) cargo operator, stands out in an industry known for its volatility and relatively low profitability. The company’s focus on the less-than-truckload niche has allowed for higher profit margins and more predictable cash flows. Despite the stock’s impressive 50% gain over the past year, its earnings have not kept pace. Trading at approximately 34 times forward earnings, ODFL may appear overvalued, especially with the looming possibility of a recession that could adversely impact the stock.
- Nucor Corporation (NUE)
Steel manufacturer Nucor may seem like a bargain with a forward earnings multiple of less than 15x. However, concerns exist that the steel industry is overvalued due to the pandemic-induced surge in demand for steel-intensive durable goods. Nucor’s revenue spiked from $22.6 billion in 2019 to $41.5 billion in the past year, but this growth may not be sustainable as economic conditions normalize. With Nucor’s peak earnings per share (EPS) at $7.42 in 2018, the $18 per share it is expected to earn this year is unlikely to endure. As economic growth slows, Nucor’s profits could plummet, potentially dragging down its stock price.
- American Airlines Group Inc. (AAL)
American Airlines, one of the largest air carriers in the United States, faced significant challenges during the pandemic, leading to a substantial increase in its long-term debt. While the stock may appear attractive with a market capitalization of $9.3 billion, its underlying financial obligations far exceed this figure. With total long-term liabilities surpassing $45 billion, American Airlines’ profitability, even during economic expansion, may not justify its valuation. Profits could decline, or the company may return to losses during the next recession, rendering AAL stock less appealing than it initially seems.
- Iron Mountain Incorporated (IRM)
Most real estate investment trusts (REITs) have encountered difficulties over the past year, primarily due to rising interest rates, which increase the cost of servicing their debts. Iron Mountain, however, has managed to buck this trend, with its stock posting a surprising 28% year-to-date gain. The company specializes in document storage and security, a niche that offers better profit margins and stability compared to some other REIT sectors. Nonetheless, Iron Mountain’s recent earnings slightly missed expectations, and funds from operations (FFO) declined year-over-year. While its results are not disastrous, the disparity between its stock performance and earnings may raise questions about its sustainability.
In conclusion, these S&P 500 stocks have demonstrated strengths in various sectors, but it is essential to consider the potential risks and uncertainties that lie ahead, including rising interest rates and economic concerns. Evaluating your investment portfolio and assessing the suitability of these stocks in light of changing market conditions is a prudent approach to protect your assets.