Projections schedule a potential Recession for the second half of 2022 or 2023. Fears of that impending trend will begin to be felt in stock prices before that.
The sector most likely to feel the effects of any Recession–and thus the sector most likely to first feel the anticipation of that Recession on stock prices–is what Standard & Poor’s calls Consumer Discretionary” stocks. (The Consumer Discretionary Select Sector SPDR ETF (XLY) tracks these stocks for the S&P 500 index.)
In my YouTube video yesterday, I flagged three stocks in this sector to sell ahead of any potential Recession–Netflix (NFLX), Starbucks (SBUX), and Lululemon Athletica (LULU).
Of these I said I would sell Lululemon first because the company is scheduled to report earnings on March 29 and it disappointed investors the last time it reported on guidance for 2022. I’d like to be out of these shares ahead of any possible re-run. I will sell Lululemon out of my Jubak Picks Portfolio on Monday, March 28. I have a 13.07% loss on that position since I initiated it on July 6, 2021.
Let me recap the my logic in selling stocks in the consumer discretionary sector ahead of a Recession.
Consumer discretionary purchases rise and fall when fluctuations in consumer incomes. When consumers have more money to spend, they’re more likely to treat themselves to a $5 cafe mocha grande or spend $100 on fitness leggings or add an extra streaming service.
When times get harder, they cut back on those kinds of purchases.
But they dan’tcut back by simply doing without or all at once.
A consumer might decide that a $5 Starbucks mocha grande is too expensive and go instead of a smaller mocha at Starbucks or walk down the street for a $3 mocha at Dunkin’ Donuts. The average household in the U.S. had seven streaming subscriptions as of September 2020. If economic times get a little tougher, that household might cut back to 5 or see if they can piggy-back with a grandchild’s subscription or drop a service for a while until there’s a new show that someone in the family really, really wants to see. Or maybe the family’s runners or yoga fanatics will decide that, hey, those leggings are good for a few more months–no need to buy new ones now–or that the $60 leggings are close enough to the $100 leggings.
The most vulnerable consumer discretionary companies are those where lots of competitors offer roughly comparable products or services at cheaper prices. That gives a consumer the choice of stepping down in price but not doing without in a Recession.
I think the three companies I tagged all live in that kind of competitive space.
And a company doesn’t have to see sales tank for its stock to suffer in the lead up to a Recession. Slower growth may be all that’s necessary if investors are counting on an elevated rate of growth.
High price-to-earnings ratios are clear danger in this environment.
Lululemon, even after dropping 20% for 2022 as of the close on March 25, still trades at 47.13 times trailing 12-month earnings per share.
That’s more risk than I want to take right now.
Especially since I can’t construct a near-term scenario that might produce a rally in the stock.