As was widely expected, the U.S. Federal Reserve again raised interest rates, lifting its key rate by 25 basis points to a range of 5% to 5.25%. Interest rates in America are now at their highest level in 16 years. While higher rates might tame inflation in the long run, they are likely to slow the economy in the near term and cause problems for certain companies. As such, investors should position their portfolios to defend against the negative consequences of a high-interest rate environment, and consider these seven top stocks to sell.
|Procter & Gamble
Stocks to Sell: PacWest Bancorp (PACW)
With higher interest rates, we could see another bank failure. On the shortlist of banks that might also fail is PacWest Bancorp (NASDAQ:PACW), whose share price has fallen more than 30% since May 1 as investors and traders assume that the lender is on shaky ground.
While major lenders such as JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) appear largely immune to the current turmoil in the banking sector, mid-size regional lenders like PacWest Bancorp continue to be vulnerable. Trading in PACW stock has been so volatile recently that it has been halted several times. PacWest recently reported a Q1 earnings beat and that its deposits remain stable. But until the Fed stops raising interest rates, regional lenders such as PacWest will remain under a cloud. PACW stock has fallen 79% in the last 12 months.
Stocks to Sell: Gap (GPS)
Clothing retailers such as Gap (NYSE:GPS) take it on the chin when interest rates rise and the economy slows. This is because consumers view clothing such as the items sold at Gap as discretionary and tend to put off spending on those products when times get tough. This reality has certainly been reflected in earnings at Gap, which have disappointed over multiple quarters. The current high-interest rate environment has proven to be a double whammy for The Gap, coming after two years of pandemic restrictions at its stores.
Gap is trying to right its ship, announcing staff layoffs and a shake-up in its executive ranks. But the retailer is likely to continue struggling while interest rates remain high and consumers struggle to balance their budgets. The pressure exerted by higher interest rates, coupled with slowing sales and poor financial results, have pushed GPS stock 32% lower in the last year. The company’s share price is now down nearly 70% over the past five years.
Stocks to Sell: Procter & Gamble (PG)
On their recent earnings call, executives at U.S. consumer products giant Procter & Gamble (NYSE:PG) acknowledged they can only raise prices so far in the current environment before consumers start to look for cheaper alternatives. The company, whose brands include Tide, Gillette, and Febreze reported that its sales volumes fell 3% in this year’s first quarter as price-sensitive consumers opted for cheaper items.
The decrease in sales volumes at Procter & Gamble was offset by price increases that averaged 10% on its various items. But executives said that further price increases are likely to be limited. With interest rates rising further, consumers are even less likely to splash out for Gillette razors when they can buy a cheaper, generic version. Procter & Gamble has now reported four consecutive quarters of declining sales volumes. All of its divisions reported lower sales in Q1, except for its health and beauty unit. The decline is likely to worsen. PG stock is flat over the last 12 months, up only a slight 0.64%.
Consumers these days are sensitive to the interest rates charged on loans, especially when those loans are used for big-ticket purchases such as a new vehicle. And loans just got more expensive after the Fed took interest rates in the U.S. to a 16-year high. This helps to explain why Tesla’s (NASDAQ:TSLA) sales have been falling, impacting both the company’s earnings and its stock. Shares of the electric vehicle maker tanked 8% recently after the company reported a 24% year-over-year decline in its Q1 net income.
On an earnings call to announce the poor results, Tesla CEO Elon Musk said he sees an “uncertain” economic environment and expects 12 months of “stormy weather” ahead for the automaker. To try and kickstart sales, Tesla has been aggressively cutting prices on its electric vehicles in jurisdictions all over the world. Tesla said it expects to produce 1.8 million vehicles this year, with the possibility of hitting a two million production milestone, depending on demand. TSLA stock is down 46% over the last 12 months.
Difficult economic times and rising interest rates force consumers to prioritize essentials such as food and shelter and cut back on other items such as high-speed internet. This is largely why AT&T (NYSE:T) recently reported abysmal quarterly results that caused its share price to fall 10%, marking the biggest one-day drop in T stock since the technology bubble burst in December 2000. Poor subscriber numbers jumped off the company’s earnings sheet.
AT&T reported that it added 424,000 regular monthly wireless subscribers in Q1 of this year, which was nearly 40% fewer than the company added a year earlier. It blamed the lower subscriber numbers on high inflation and rising interest rates, which, the company said, made consumers reluctant to spend money on 5G wireless service. AT&T reiterated that it is on track to surpass 30 million fiber-optic internet subscribers by the end of 2025. But that forecast is based on interest rate hikes ending in the near term. T stock is down 11% over the last 12 months.
Credit card giant Visa (NYSE:V) reported strong first-quarter earnings driven by spending on international travel. But can that last as interest rates rise and the global economy slows? Visa said that its Q1 outperformance was due to an acceleration of global travel, with cross-border volumes on its credit cards up 24% from a year earlier. The company said it is benefitting as consumers around the world travel more after two years of Covid-19 lockdowns. Overall volume on Visa’s credit cards rose 9% to $3.6 trillion during Q1.
While Visa didn’t warn of an immediate slowdown in worldwide travel, most economists (and the World Bank) are forecasting that higher rates will tip the global economy into a recession this year. Should that happen, it will no doubt hit the travel industry and ding credit card issuers such as Visa. While Visa has remained resilient so far, its business could face a downturn in this year’s second half, notably during the summer travel season. Visa’s stock has risen 9% in the last 12 months.
There are a lot of reasons to sell Intel (NASDAQ:INTC). After all, the company did just report the biggest loss in its 55-year history for this year’s first quarter. However, Intel is borrowing so much money right now as it spends more than $20 billion to reposition its chip factories as foundries that higher interest rates are sure to be a drag on its balance sheet. Companies taking out loans to fund growth are particularly vulnerable to higher rates.
Intel is already struggling, announcing a 133% annual reduction in its Q1 earnings per share and reporting that its revenue in Q1 fell 36% from a year earlier to $11.7 billion. Worse, the company forecast that it will lose 4 cents a share on revenue of $12 billion in the current second quarter, below Wall Street expectations. This year’s Q1 marked the fifth consecutive quarter of falling sales at Intel. The company is being hurt by declining sales of personal computers that use its chips and semiconductors, which has been prompted by high-interest rates.
INTC stock is down 32% in the past year.
On the date of publication, Joel Baglole held long positions in BAC and V. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.