Risk management is without a doubt one of the most important concepts in investing. Whether it’s determining the right amount of money that you invest in a company, diversifying, or understanding what your maximum loss could be, it is vital to limit your risk if you expect to find success in financial markets. One important component of risk management involves understanding the problems that certain businesses are facing so that you can avoid buying into a potentially sinking ship.
The S&P 500 has rebounded extremely well off of its March lows and provided us with one of the strongest rallies in recent memory. However, it’s important to remember that the S&P 500 is a market-cap weighted index containing hundreds of companies. Just because a company is in the S&P 500 doesn’t mean it is a great business. There are quite a few S&P 500 stocks that are actually in serious trouble at this time due to a variety of factors. These are companies that you might be tempted to buy just because of how hard their prices have fallen, but many possess significant risks that cannot be ignored. Let’s take a look at 3 S&P 500 stocks to avoid below.
Macy’s Inc (NYSE: M)
It is difficult to come up with bullish reasons which support an investment in this classic American retail stock at this time. Some investors might be looking to buy thanks to the fact that Macy’s stock is down over 62% year-to-date, but when you realize how difficult of a path towards recovery the company faces, you start to understand that the decline happened for a good reason. Consumer spending is down big and might not return in the foreseeable future, which is why retail stores like Macy’s are taking a beating in the market. Macy’s also missed the boat on the e-commerce trend and was in trouble even before the pandemic thanks to the decline in the mall sector.
There are just too many market trends working against Macy’s stock to consider buying shares. Although Macy’s is an iconic brand and has been slashing its high debt levels down since 2016 to improve its balance sheet, the company has reported huge losses lately which are likely to deepen in the coming months. Investors should anticipate more store closings and financial turmoil for this S&P 500 stock for the rest of the year, which is why it’s best to avoid it at this time.
Wells Fargo & Co (NYSE: WFC)
The financial sector has been one of the weakest in the market since the pandemic began, and there’s just too much risk at this point to consider adding a name like Wells Fargo to your portfolio. The stock is down 52% year-to-date as the U.S. stares down a huge GDP decline and a severe global recession. Although the Federal Reserve is doing its best to keep financial markets stable, banks like Wells Fargo could still suffer massive losses from the credit market, trading, and its exposure to debt securities. Keep in mind that interest rates are at historic lows, which means a major revenue driver for banks like Wells Fargo has essentially disappeared.
You might be attracted to this stock’s juicy 8% dividend yield, but there’s a good chance that it will have to cut its dividend based on the recent Federal Reserve stress test. Add to that the company’s exposure to the subprime auto loan market and the risks just keep piling up. Avoiding this S&P 500 stock until there is more clarity about the economy and the financial sector is probably the right call.
Carnival Corp (NYSE: CCL)
The travel industry has been absolutely obliterated by the global pandemic, and stocks in the sector are among the worst-performing in the market. Carnival stock is down 67% year-to-date and the company could be in big trouble going forward. There’s simply too much bad news surrounding this stock to consider dipping your toes into the water with a position. Sailing is currently suspended for cruise operators until September 30th, 2020, and seeing that date extended out even further would not be surprising.
Although Carnival Cruise stock still trades in the S&P 500, it’s possible that will change in the near future. In fact, S&P cut its rating from BBB- to BB+ on Carnival’s secure bonds. Any bonds that are rated below the BBB- level are considered below investment grade or “junk bonds”. This has to do with the substantial debt burden and cash flow issues that the company is currently dealing with. Avoiding Carnival Cruise stock at this point is advisable.
Better Safe Than Sorry
While it’s possible that these companies are able to rebound after they sort out their problems and the economy starts to improve, it’s probably best to avoid any investments in these businesses for the time being. When the investment risks simply don’t outweigh the rewards, its best to err on the side of caution, and that is absolutely the case with these 3 S&P 500 stocks.
Companies Mentioned in This Article
8 Tech Companies Set to Shine in a Social Distancing World
Telecommuting has been on the rise for many years. But it’s still not the norm. And that’s why, in the wake of our society’s call to flatten the curve of the coronavirus, more Americans find themselves in the unfamiliar position of working from home.
Aside from the mental and emotional challenge that some employees face from not having a defined workplace outside of the home, there are logistical challenges for businesses to ensure their employees can manage their work efficiently and effectively.
However, other Americans are sequestered, not by choice, but because they have no business to go-to for the time being. They face a different, unique set of challenges as more and more states begin to close bars, restaurants, and other social meeting venues.
It all happened so fast. And as an investor, it may be tough to think of investing in the market now, or ever again. But history favors those investors who have stayed the course even in the midst of a severe bear market that will quite possibly dip the economy into a recession.
And that’s why we’ve identified 8 technology companies that are poised to have a breakout moment in this time of social distancing.
View the "8 Tech Companies Set to Shine in a Social Distancing World".