These are the type of securities that get crushed when inflation is running at unsustainable levels
- The stocks to avoid during inflation often involve luxuries, but that’s not the only space that’s affected.
- Foot Locker (FL): The sneaker and apparel retailer is the type of discretionary consumer stock that gets crushed by inflation.
- Wynn Resorts (WYNN): Leisure travel is a luxury at the best of times, but vacationing in Las Vegas takes a backseat when consumer prices run high.
- Teladoc (TDOC): The telemedicine stock is an example of the type of unprofitable tech company that investors flee when times get tough.
Inflation can be tricky to navigate. That’s especially true when consumer price increases are at 40-year highs, as they are in the U.S. right now. Suddenly everything is more expensive — from essentials such as gasoline and groceries to discretionary items such as restaurants, travel and entertainment. In these times, consumers have to make hard choices and are often forced to prioritize spending on necessities at the expense of luxuries. This also leads to several different kinds of stocks to avoid.
Higher interest rates used to smother inflation and cool it off can also wreak havoc on certain sectors of the economy, namely technology companies that borrow to fund their rapid growth and whose finances are extremely sensitive to rate hikes. In an inflationary environment, it is best for investors to own stocks of companies that have pricing power and can raise their prices without losing customers. It is also good to focus on blue-chip stocks that have stable earnings and low valuations rather than unprofitable tech start-ups that are growing rapidly while taking on debt and bleeding money.
Here are three stocks to avoid in the current period of high inflation.
Foot Locker (FL)
Foot Locker (NYSE:FL), a retail chain that sells running shoes and related athletic apparel, is the classic type of consumer discretionary stock that suffers when prices rise precipitously. Consumers are not likely to be overly concerned with buying a new pair of Nike Jordan sneakers when they are having trouble affording gas for their car. This may help to account for the fact that FL stock has fallen 34% this year. In the last 12 months, Foot Locker’s stock has fallen 50%.
This is not to say that Foot Locker is a bad business. In February, the athletic footwear retailer reported earnings-per-share (EPS) of $1.67, handily beating analysts’ consensus estimates of $1.43. The company’s revenue matched analyst expectations of $2.34 billion, which was up 7% year-over-year. The company also recently increased its quarterly dividend to 40 cents per share from 30 cents previously. This represents a $1.60 dividend on an annualized basis and a dividend yield of 5.28%.
Rather, the fall in FL stock can be squarely put on inflation.
Wynn Resorts (WYNN)
Travel and vacations also take a backseat when inflation is running hot. It can be difficult to justify a trip to Las Vegas when food prices are 30% higher than they were a year ago. This helps to explain why hotel and casino operator Wynn Resorts (NASDAQ:WYNN) stock has fallen 25% in the past six months to just over $70 a share, including a 20% decline through the first four months of this year.
Wynn Resorts properties are largely focused in the gambling meccas of Las Vegas and Macau, China. However, those gambling hot spots have been hit with a double whammy that has hurt tourism over the past two years — the Covid-19 pandemic and now sky high inflation.
Wynn Resorts fourth quarter 2021 earnings were mixed. The company reported operating revenue of $1.05 billion, up 54% from the final months of 2020 when most of its properties were shuttered due to the pandemic. However, Wynn Resorts still reported a Q4 net loss of $177.2 million or $1.54 per share. That was an improvement from a loss of $2.53 a share in Q4 2020. But still nothing to write home about.
The company’s long-term debt has also swelled to nearly $12 billion due to the pandemic when its revenue was obliterated. The debt has also given investors and analysts pause when it comes to WYNN stock. Definitely not one to own in an inflationary environment.
There are a lot of formerly high-flying, massively unprofitable technology companies that thrived during the pandemic only to implode over the past year as Covid-19 restrictions eased and inflation reared its ugly head. But few tech stocks can serve as a better cautionary tale of what to avoid when inflation is running hot than Teladoc (NYSE:TDOC). The virtual healthcare company that specializes in connecting people with physicians remotely has seen its stock plummet 80% over the past 12 months, including a 40% single-day drop after the company issued its most recent quarterly earnings results.
At $37 a share, TDOC stock is now nearly 90% below its all-time high of $293.66 reached in February 2021.
The implosion is due to many factors. But the bottom line is that Teladoc is the type of fledgling technology stock that analysts and investors run away from when monetary policy is tightening, interest rates are marching higher, and there is a general flight to safe haven assets.
Steep valuations, high debt levels and a lack of profits scare off investors when the U.S. central bank raises interest rates and the days of easy money come to a screeching halt. Teladoc reported a record loss of $6.7 billion, or a loss of $41.58 per share, for the first quarter of this year due mainly to an impairment charge it was hit with on a previous acquisition. Regardless of the reason, the loss was unforgivable in the view of Wall Street.
This article originally appeared at InvestorPlace.
On the date of publication, Joel Baglole 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.