In this article, we discuss the 10 stocks you should sell before recession.
On April 25, financial services firm Deutsche Bank, which had been the first United States bank to forecast a recession earlier this year, warned of a much deeper downturn in the economy. Market experts at the bank, in a note to clients, noted that there will be a “major recession” despite inflation peaking. The problem, per the bank, was that it would take a “long while” for inflation to go down to 2%. In order to push more aggressively towards the 2% target, the Federal Reserve would issue stronger rate hikes and end up hurting overall growth.
The specter of rising inflation and interest rates has already battered growth stocks across the board, with even giants like Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) feeling the heat of an economic slowdown. The first signs of a recession have already arrived. Government data indicates that the US gross domestic product (GDP) declined by 1.4% in the first quarter. Analysts had predicted that the GDP would register 1% growth during the period.
Mortgage loan firm Fannie Mae said in mid-April that it expected a “modest recession” to hit the US in 2023. The International Monetary Fund and the World Bank have also revised their global growth outlooks in light of the worsening situation in the US, one of the largest economies in the world. Investment bank Goldman Sachs has also forecast a recession in the US, rating the likelihood of an economic slowdown at 15% in the next year and 35% within the next two years. Bank of America has also warned of a “recession shock”.
Luis Louro / shutterstock.com
Our Methodology
The companies that have given weak outlooks in their recent quarterly reports citing supply chain issues, weak economy, and inflation, as well as the stocks that are at the risk of losing value because of a looming recession were selected for the list.
Stocks You Should Sell Before Recession
10. Green Brick Partners, Inc. (NYSE:GRBK)
Number of Hedge Fund Holders: 12
Green Brick Partners, Inc. (NYSE:GRBK) is a home building and land development firm. The stock has nosedived by close to 30% since the start of the year as home building firms deal with the fallout of rising interest rates that have pressured margins and led to concerns about the sustainability of present demand trends. Investors have also been dumping the stock ahead of the predicted recession since housing stocks have historically underperformed during times of economic crisis.
On March 20, JPMorgan analyst Michael Rehaut downgraded Green Brick Partners, Inc. (NYSE:GRBK) stock to Underweight from Neutral and reduced the price target to $20 from $26.50, noting that the shares seemed expensively valued given the return outlook.
At the end of the fourth quarter of 2021, 12 hedge funds in the database of Insider Monkey held stakes worth $587 million in Green Brick Partners, Inc. (NYSE:GRBK), compared to 16 the preceding quarter worth $392 million.
Just like Amazon.com, Inc. (NASDAQ:AMZN) Alphabet Inc. (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT), Green Brick Partners, Inc. (NYSE:GRBK) is one of the stocks vulnerable to rising inflation.
In its Q1 2021 investor letter, Black Bear Value Partners, an asset management firm, highlighted a few stocks and Green Brick Partners, Inc. (NYSE:GRBK) was one of them. Here is what the fund said:
“Green Brick Partners, Inc. (NYSE:GRBK) is a residential land developer and homebuilder. Most of their operations are in Texas, Georgia, and Florida. Green Brick Partners, Inc. (NYSE:GRBK) was formerly a private partnership between Jim Brickman and entities related to Greenlight Capital (managed by David Einhorn). David is currently the Chairman of the Board.
As discussed earlier, there is a long-term fundamental supply/demand imbalance in housing inventory. This is a direct result of underproduction of new homes amid a challenging mortgage financing environment over the last 10+ years since the Great Financial Crisis. Looking forward we should have increased housing demand from millennials as they enter the family-phase of life and desire more space.
It is rare to be able to partner with an excellent operator and an excellent capital allocator. As evidenced by our investment in AutoNation, when you marry those 2 concepts you can wind up with a wonderful result. Green Brick Partners, Inc. (NYSE:GRBK) has been reinvesting their cashflow in additional lots/land inventory. This masks the earnings power of the company. The company is valued somewhere between 5-8x steady-state earnings and potentially even cheaper than that. I tend to be more conservative given the potential for rate rises and inflationary increases in development costs. We have high-quality stewards at both the operating and Board level.”
9. Rocket Companies, Inc. (NYSE:RKT)
Number of Hedge Fund Holders: 20
Rocket Companies, Inc. (NYSE:RKT) is a tech-based real estate firm. The company missed market estimates on earnings per share and revenue for the fourth quarter of 2021 by $0.05 and $180 million respectively. Mortgage loan originations and gain on sale fell during the period and were responsible for the earnings miss. Jay Farner, the CEO of the firm, highlighted the impact of the Omicron outbreak on earnings in the first quarter. Per Farner, the virus had “disrupted our business and required us to again send team members home for their safety”.
On April 12, Barclays analyst Mark DeVries maintained an Equal Weight rating on Rocket Companies, Inc. (NYSE:RKT) stock and lowered the price target to $13 from $14, noting that the first half of 2022 would be challenging for originators.
Among the hedge funds being tracked by Insider Monkey, Chicago-based firm Citadel Investment Group is a leading shareholder in Rocket Companies, Inc. (NYSE:RKT) with 1 million shares worth more than $14 million.
In its Q4 2021 investor letter, Andaz Private Investments, an asset management firm, highlighted a few stocks and Rocket Companies, Inc. (NYSE:RKT) was one of them. Here is what the fund said:
“This volatility i.e., the behaviour of others, is a result of market participants pursuing a few thematic ideas. One is that the cessation of money printing by central banks and the flagging of interest rate rises may favour near-term cashflow oriented stocks over tech stocks. Second, a few stocks that we hold are also held by ETFs run by ARK Investment Management. ARK has been experiencing outflows, as well as bets against their ETFs, and this is amplifying price movements in all of ARK’s stocks. Omicron is also disrupting and impacting societies/economies, obviously, but more broadly this pandemic is now affecting decision-making to the degree where: a) pessimism in one area is translating into over-optimism in other areas, and b) complacency in thought is somehow simultaneously coupled with hyperactive cynicism.
This can be observed not only across various asset classes, but even within a single asset class e.g. comparing various commodities, comparing bonds, equities, and so on. All of this is resulting in price action that is less about long-term security/stock selection or short-term execution, but the path/behaviour of prices during the middle phase.” (Click here to see full text)
8. CarMax, Inc. (NYSE:KMX)
Number of Hedge Fund Holders: 35
CarMax, Inc. (NYSE:KMX) is a used vehicles retailer. The firm missed market estimates on earnings per share for the fourth quarter of 2021 by $0.25. During the period, the total retail unit sales for the firm stood at 194,318, a decline of 5.2% year-on-year. Retail used vehicle gross profit declined 0.2%, indicative of the decline in retail unit sales. The company cited “declining consumer confidence, the Omicron-fueled surge in COVID cases, and vehicle affordability” as some of the reasons for the earnings miss.
On April 13, Wedbush analyst Seth Basham kept a Neutral rating on CarMax, Inc. (NYSE:KMX) stock and lowered the price target to $90 from $95, noting the fourth quarter earnings of the firm missed expectations and fell way short of the bottom line.
Among the hedge funds being tracked by Insider Monkey, Virginia-based investment firm Akre Capital Management is a leading shareholder in CarMax, Inc. (NYSE:KMX) with 7.2 million shares worth more than $949 million.
In its Q4 2021 investor letter, Giverny Capital, an asset management firm, highlighted a few stocks and CarMax, Inc. (NYSE:KMX) was one of them. Here is what the fund said:
“As for the rest of our top 10 holdings, CarMax, Inc. (NYSE:KMX) finished 2021 as our second-largest holding and it simply plows ahead, turning in good results even though much of the market seems skeptical of its model. Carmax continues to take market share profitably in the massive used car market. It seems to have disappointed some investors by not generating even more profit in recent months, as used car prices soared. But CarMax, Inc. (NYSE:KMX) has always been very clear that it will maintain its mark-ups on cars at about $2,100 per vehicle, even as retail prices ebb and flow. That practice provides customers with a fair deal and shareholders with a good return. CarMax, Inc. (NYSE:KMX) shares rose 38% in 2021 but have been quite weak to start 2022.”
7. Zoom Video Communications, Inc. (NASDAQ:ZM)
Number of Hedge Fund Holders: 48
Zoom Video Communications, Inc. (NASDAQ:ZM) owns and runs a video communications platform. The stock has declined in value by more than 67% year-to-date as a reopening economy and the gradual easing of virus restrictions leads to the reopening of physical workspaces, thus reducing the need for Zoom software. Rising inflation has also spooked investors away from high growth names like Zoom towards safer options. The firm expects first quarter revenue to be just short of analyst estimates.
On March 15, Wells Fargo analyst Michael Turrin kept an Equal Weight rating on Zoom Video Communications, Inc. (NASDAQ:ZM) stock and lowered the price target to $105 from $145, noting the broader compression in the software industry.
Among the hedge funds being tracked by Insider Monkey, New York-based firm Tiger Global Management LLC is a leading shareholder in Zoom Video Communications, Inc. (NASDAQ:ZM) with 6.1 million shares worth more than $1.1 billion.
In its Q1 2021 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and Zoom Video Communications, Inc. (NASDAQ:ZM) was one of them. Here is what the fund said:
“We concluded our campaigns in Zoom Video Communications, Inc. (NASDAQ:ZM). We have been paring our position in Zoom Video Communications, Inc. (NASDAQ:ZM) for several quarters, anticipating the reduced need for video conferencing as vaccination rates climb and people return to their workplaces. That said, we believe there is a strong case to be made that the pandemic has prompted a permanent inflection in videoconferencing’s importance—sustainably higher remote work arrangements, more online learning and less business travel. Furthermore, the company’s dramatically expanded user base (up 485% YoY in Q3) positions it well to cross sell additional services, Zoom Phone in particular. The long-term future remains bright, but we decided to end our successful investment campaign in favor of opportunities in our pipeline with more attractive near-term growth prospects.”
6. Zillow Group, Inc. (NASDAQ:Z)
Number of Hedge Fund Holders: 61
Zillow Group, Inc. (NASDAQ:Z) is a digital real estate firm. Investors have been dumping the shares in the past few months amid concerns around the declining home sales, constrained inventories, and higher pricing due to inflation. The stock has tanked by close to 70% since the start of the year. The traffic on the Zillow mobile app and websites has also failed to improve from 198 million unique monthly active users in the fourth quarter of 2021, the same as the previous year. Analysts have also called on the firm to monetize more home transactions on Zillow platforms in the US.
On March 30, Goldman Sachs analyst Michael Ng initiated coverage of Zillow Group, Inc. (NASDAQ:Z) stock with a Neutral rating and a price target of $57, predicting that online real estate platforms would “face traffic growth headwinds from declining home sales and low inventory” in the coming months.
At the end of the fourth quarter of 2021, 61 hedge funds in the database of Insider Monkey held stakes worth $2.2 billion in Zillow Group, Inc. (NASDAQ:Z), compared to 67 in the preceding quarter worth $4.2 billion.
In addition to Amazon.com, Inc. (NASDAQ:AMZN) Alphabet Inc. (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT), Zillow Group, Inc. (NASDAQ:Z) is one of the stocks with exposure to inflation-related risks.
In its Q4 2021 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Zillow Group, Inc. (NASDAQ:Z) was one of them. Here is what the fund said:
“Real Estate investments detracted the most from relative performance, with real estate marketplace Zillow Group, Inc. (NASDAQ:Z) accounting for all of the weakness. Zillow unexpectedly announced that it was exiting its homebuying business, as it became apparent that the company had overpaid for many homes. We were surprised and disappointed by these developments and decided to exit our position in the company.
Zillow Group, Inc. (NASDAQ:Z) operates the leading residential real estate websites in the U.S. In 2018, Zillow entered the iBuying market through its Zillow Offers unit, which purchased and resold homes, while also providing title, escrow, and mortgage services. By 2020, Zillow Offers had grown rapidly, was available in 25 markets and generated $1.7 billion in revenues. We were excited by the rapid growth in this business segment, and we believed that it could become a significant contributor to Zillow’s overall profitability. In November 2021, Zillow Group, Inc. (NASDAQ:Z) unexpectedly announced that it was exiting the home business, as it became apparent that the company had overpaid for a large number of homes, leading to a $500 million write-off. Their explanation for this shocking development was that the valuation algorithms they had developed had made dramatic errors. We were surprised and disappointed by these developments, which caused us to lose conviction in the company’s management and strategy. We exited the position during the quarter.”
5. Netflix, Inc. (NASDAQ:NFLX)
Number of Hedge Fund Holders: 113
Netflix, Inc. (NASDAQ:NFLX) owns and runs an entertainment platform. On April 19, the firm missed market estimates on revenue by $70 million. The shares have lost nearly 61% in value year-to-date, with over 20% of this loss coming in a single day on April 19 as the company revealed that it had lost 200,000 subscribers on a net basis in the fourth quarter, falling way short of expectations of an increase of 2.5 million subscribers. The firm expects to lose another 2 million subscribers in the second quarter.
On April 21, Citi analyst Jason Bazinet kept a Buy rating on Netflix, Inc. (NASDAQ:NFLX) stock and lowered the price target to $295 from $450. The price target was cut merely a few hours after the company posted disappointing first quarter results.
Among the hedge funds being tracked by Insider Monkey, Chicago-based firm Citadel Investment Group is a leading shareholder in Netflix, Inc. (NASDAQ:NFLX) with 4.1 million shares worth more than $2.4 billion.
In its Q4 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Netflix, Inc. (NASDAQ:NFLX) was one of them. Here is what the fund said:
“We were quite active during the quarter, leveraging volatility to add 10 new names to the portfolio while exiting seven others. Among our new purchases was Netflix in the communication services sector. Netflix, Inc. (NASDAQ:NFLX) is the global leader in the production and distribution of streaming entertainment, operating a high-quality subscription business with room for continued growth in a large addressable market. The stock has faced headwinds due to concerns around subscriber growth. We attribute this recent weakness to COVID-related production delays that have slowed the pace of new shows premiering on the platform and believe Netflix, Inc. (NASDAQ:NFLX) has a strategic advantage in scaling its business given its large content library and lead versus peers in establishing local content studios and partnerships.”
4. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 134
Apple Inc. (NASDAQ:AAPL) makes and sells consumer electronics. Although the company beat market estimates on earnings per share and revenue for the second fiscal quarter, Tim Cook, the CEO of the firm, said during the earnings call that Apple was not immune to the “challenges caused by the war in Ukraine and COVID-related disruptions in China”. A senior Apple executive also revealed that the earnings of the firm would be impacted by “supply constraints, silicon shortages, with the value of the constraints between $4 billion and $8 billion”.
On April 29, Deutsche Bank analyst Sidney Ho kept a Buy rating on Apple Inc. (NASDAQ:AAPL) stock and lowered the price target to $200 from $210, noting that the firm faces “increased supply-chain and demand uncertainty from China looking forward”.
At the end of the fourth quarter of 2021, 134 hedge funds in the database of Insider Monkey held stakes worth $186 billion in Apple Inc. (NASDAQ:AAPL), up from 120 in the previous quarter worth $146 billion.
In its Q4 2021 investor letter, Berkshire Hathaway highlighted a few stocks and Apple Inc. (NASDAQ:AAPL) was one of them. Here is what the fund said:
“Apple Inc. (NASDAQ:AAPL) – our runner-up Giant as measured by its yearend market value – is a different sort of holding. Here, our ownership is a mere 5.55%, up from 5.39% a year earlier. That increase sounds like small potatoes. But consider that each 0.1% of Apple’s 2021 earnings amounted to $100 million. We spent no Berkshire funds to gain our accretion. Apple’s repurchases did the job. It’s important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports – and last year, Apple paid us $785 million of those. Yet our “share” of Apple’s earnings amounted to a staggering $5.6 billion. Much of what the company retained was used to repurchase Apple Inc. (NASDAQ:AAPL) shares, an act we applaud. Tim Cook, Apple’s brilliant CEO, quite properly regards users of Apple Inc. (NASDAQ:AAPL) products as his first love, but all of his other constituencies benefit from Tim’s managerial touch as well.”
3. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holders: 158
Alphabet Inc. (NASDAQ:GOOG) is a technology company based in California. On April 26, the company posted earnings for the first quarter of 2022, missing market estimates on earnings per share by $1.14. YouTube growth also showed signs of slowing as ad revenue grew at only 14%. The net income also dipped to $16.44 billion, down from $17.93 billion over the same period last year. Ruth Porat, the CFO of the firm, has said that the slowdown in growth had come as a result of the “industry wide advertising hiccups” due to the Russia-Ukraine war.
On April 27, Guggenheim analyst Michael Morris kept a Buy rating on Alphabet Inc. (NASDAQ:GOOG) stock and lowered the price target to $3,000 from $3,350, identifying tough comps, Russia impact, and unfavorable foreign exchange impacts as some of the headwinds for the firm.
Among the hedge funds being tracked by Insider Monkey, London-based investment firm TCI Fund Management is a leading shareholder in Alphabet Inc. (NASDAQ:GOOG) with 2.9 million shares worth more than $8.5 billion.
In its Q4 2021 investor letter, Vulcan Value Partners, an asset management firm, highlighted a few stocks and Alphabet Inc. (NASDAQ:GOOG) was one of them. Here is what the fund said:
“In contrast, we made a different kind of mistake about a decade ago. Google, now Alphabet Inc. (NASDAQ:GOOG), performed very well for us while we owned it. The company kept outperforming our assumptions and we kept lowering them to be conservative. “Trees do not grow to the sky.” The stock kept going up and our value grew but did not keep pace with the stock. It hit our estimate of fair value and we sold it with a nice gain, patting ourselves on the back. We kept following the company and what they actually did over the next several years was roughly double the assumptions we used to value it. Therefore, our value was too conservative, and we sold it too cheaply, missing many years of compounding. Fortunately, we experienced some volatility several years ago that allowed us to purchase Alphabet Inc. (NASDAQ:GOOG) (Google) again with a margin of safety.”
2. Meta Platforms, Inc. (NASDAQ:FB)
Number of Hedge Fund Holders: 224
Meta Platforms, Inc. (NASDAQ:FB) is a tech firm that owns and runs social media platforms. Privacy concerns were already weighing heavily on the firm when the twin threat of inflation and rising interest rates decreased investor confidence in the stock further over the past few months. Online advertising revenue for the firm has been affected this year due to multiple factors that include the impact of the Ukraine war, soft brand ad spend, and likely impact from declining consumer spend in Europe that is driven by inflation and oil prices.
On April 28, MKM Partners analyst Rohit Kulkarni maintained a Buy rating on Meta Platforms, Inc. (NASDAQ:FB) stock but lowered the price target to $295 from $315, noting that the first quarter results of the firm were mixed and forward guidance soft.
At the end of the fourth quarter of 2021, 224 hedge funds in the database of Insider Monkey held stakes worth $31.8 billion in Meta Platforms, Inc. (NASDAQ:FB), compared to 248 in the preceding quarter worth $38.5 billion.
In its Q4 2021 investor letter, Boyar Value Group, an asset management firm, highlighted a few stocks and Meta Platforms, Inc. (NASDAQ:FB) was one of them. Here is what the fund said:
“Corporate executives can have many different reasons for selling shares (anticipation of tax law changes, philanthropy, diversification, and much more), but the sheer number of billionaire founders who sold shares in 2021 should raise eyebrows and might well be signaling a market top. Bloomberg’s Ben Steverman and Scott Carpenter report not only that Mark Zuckerberg of Meta Platforms, Inc. (NASDAQ:FB) (formerly known as Facebook) sold shares in his company almost every day last year but also that the founders of Google sold ~$3.5 billion worth of stock (the first time either Sergey Brin or Larry Page has sold shares since 2017).”
1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 279
Amazon.com, Inc. (NASDAQ:AMZN) is a diversified tech firm with core interests in ecommerce. On April 29, the share price of the company slid by nearly 16%, the worst single day of decline for the company in nearly eight years. On April 28, the company had missed market estimates on earnings per share by a whopping $15.78 and posted a revenue of $116 billion, roughly in line with market expectations. The net sales for the second quarter were guided below consensus estimates as well.
On April 29, Truist analyst Youssef Squali kept a Buy rating on Amazon.com, Inc. (NASDAQ:AMZN) stock and lowered the price target to $3,500 from $4,000, noting that ecommerce demand was normalizing and cost pressures were rising for the firm.
Among the hedge funds being tracked by Insider Monkey, London-based investment firm Citadel Investment Group is a leading shareholder in Amazon.com, Inc. (NASDAQ:AMZN) with 4.1 million shares worth more than $13 billion.
In its Q4 2021 investor letter, Mercator International, an asset management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ:AMZN) was one of them. Here is what the fund said:
“Transformative technologies often generate euphoria. People are excited by the big new thing that is changing the world. We saw this pattern with the boom of westward canal transportation at the dawn of the nineteenth century. Railway stocks similarly attracted large numbers of eager investors a few decades later. Then came the electrification of America, the telephone, and the automobile industry, to name just a few transformative technologies.
The initial euphoric phase always ends with a reality check. Valuations come back to earth. At the end of the cycle, only a few companies remain standing. A shakeout has a way of clarifying the field of opportunities.
For example, readers may recall that when the internet bubble burst two decades ago, Amazon.com, Inc. (NASDAQ:AMZN) stock suffered greatly but pet.com was gone. For those investors who had stayed on the sidelines, this was an excellent time to buy Amazon.com, Inc. (NASDAQ:AMZN). The company’s business model had shown its merits and competition was rapidly shrinking. The stock price was now also much more attractive.”
You can also take a peek at 10 High-Yield Dividend Stocks with Payout Ratio Less than 55% and 10 Stocks to Buy Today According to British Billionaire David Harding.
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Disclosure. None. 10 Stocks You Should Sell Before Recession is originally published on Insider Monkey.
