7 Stocks to Sell as Borrowing Costs Rise
With major economic weakness possibly lurking around the corner, investors should consider targeting stocks to sell. Specifically, market participants should note securities that feature rising short borrow fees. As the name suggests, brokerag…
With major economic weakness possibly lurking around the corner, investors should consider targeting stocks to sell. Specifically, market participants should note securities that feature rising short borrow fees. As the name suggests, brokerage firms charge fees to clients who borrow shares for shorting purposes. Further, the more difficult the underlying security is to borrow, the higher the fee. On paper, rising borrowing costs indicate greater demand among short sellers, which is naturally bearish for impacted enterprises. True, the risk of the contrarian wave – the short squeeze – may rise as borrowing costs go northward. However, some enterprises feature flawed financials or fundamental headwinds. Therefore, you may want to avoid the below stocks to sell.
Rocket Companies (RKT)
While Rocket Companies (NYSE:RKT) enjoyed a decent run this year, circumstances may sour soon. As InvestorPlace contributor Dana Blankenhorn mentioned, the Personal Consumption Expenditures (PCE) index – which the Federal Reserve uses as its best gauge for inflation – moved up higher than expected. Because of this dynamic, it’s possible that the central bank may continue to raise the benchmark interest rate. Naturally, that’s going to exacerbate the affordability crisis in the real estate market, thus hurting mortgage providers like Rocket. Subsequently, I’m concerned about its forward viability. According to data from Fintel, RKT’s short borrow fee rate increased from 7.35 on Feb. 21 to a maximum of 9.52 on Feb. 24.
Financially, arguably most investors won’t like what they see. Its balance sheet carries too much debt relative to cash. In fact, it’s one of the worst-rated companies for this metric. Also, its three-year revenue growth rate (on a per-share basis) slipped 45.9% below parity. Covering analysts peg RKT as a consensus hold with a 14% downside risk warning. Unfortunately, it’s one of the stocks to sell.
Lannett Company (LCI)
According to its website, Lannett Company (NYSE:LCI) provides high-quality, affordable generic pharmaceutical products. Fundamentally, Lannett caters to a significant need and thus features an extremely relevant profile. Unfortunately, LCI just hasn’t delivered the goods to stakeholders. In the trailing year, LCI gave up 35% of equity value. Going to Fintel, Lannett’s short borrow fee increased from 5.2 on Feb. 16 to a maximum of 7.07 on Feb. 24. Notably, in the trailing week, LCI stumbled nearly 14%. Further, Gurufocus.com warns that the company may be a possible value trap.
On paper, LCI’s price-to-sales ratio of 0.07 times may seem extremely attractive. However, investors must also realize that its three-year revenue growth rate sits 21.3% below breakeven. As well, both its operating and net margins swim in red ink. If that wasn’t bad enough, it features a distressed balance sheet. Turning to Wall Street, only one analyst covers LCI and it’s a hold rating. Given the lack of enthusiasm, LCI may be one of the stocks to sell.
Based in New Jersey, electroCore (NASDAQ:ECOR) is a medical technology firm. It specializes in what it terms nVNS therapy, which stimulates the vagus nerve. In turn, research indicates that this process helps people suffering from a variety of disorders. While scientifically intriguing, ECOR failed to entice its stakeholders. Since the January opener, shares fell more than 11%.
What’s worse, in the trailing year, ECOR gave up over 60% of its equity value. Per Fintel’s data, the stock’s short borrow fee jumped from 3.03 on Feb. 16 to a maximum of 6.41 on Feb. 24. Notably, Gurufocus.com warns its readers that it might be a possible value trap. On paper, electroCore seems attractive. For instance, its three-year revenue growth rate stands at 39.5%. Further, its discounted, with shares trading at a sales multiple of 2.22, below 68% of the competition. However, its explosive growth appears to be diminishing. On the flip side, its net losses have expanded recently. To be fair, covering analysts believe ECOR will jump to $30, representing a 750% lift. However, operationally, it seems like one of the stocks to sell.
Online used-car retailer Carvana (NYSE:CVNA) initially enjoyed tremendous relevance. When the coronavirus pandemic first broke out, people didn’t want to take public transportation for obvious reasons. Therefore, many first-time car buyers took to Carvana for its inherently contactless service. However, with Covid-19 fears fading, this narrative no longer attracts investors.
That’s the understatement of the century. Although CVNA jumped higher by 73% this year, in the trailing 365 days, it’s down 95%. Again, Gurufocus.com warns that CVNA may be a possible value trap, and for good reason. Sure, its sales multiple sits in the subterranean territory at 0.06. However, its margins are struggling, with net profitability down in red ink. Per Fintel, Carvana’s short borrow fee increased from 0.55 on Feb. 20 to a maximum of 10.32 on Feb. 24.
Financially, it’s not sustainable so I’m not surprised that Wall Street analysts peg CVNA as a consensus hold. In fairness, their average price target of $9.58 implies nearly 20% upside potential. However, with the Fed dealing with higher-than-expected inflation, CVNA pings as one of the stocks to sell.
Genius Brands (GNUS)
Billed as an entertainment company, Genius Brands (NASDAQ:GNUS) focuses on a fun learning experience for young children. It’s an interesting concept and therefore attracted much speculative interest. However, with the Fed likely to raise interest rates and thus impose significant pressure on the broader economy, GNUS seems risky. Indeed, the chart performance should convince most investors that GNUS ranks among the stocks to sell. Since the January opener, GNUS hemorrhaged nearly 38% of its equity value. And in the trailing year, it’s down 65%. Per Fintel, Genius Brands’ short borrow fee rate increased from 5.25 on Feb. 22 to 7.10 on Feb. 24.
Not shockingly, Gurufocus.com warns its readers that Genius may be a possible value trap. While it’s priced attractively against trailing book value (0.78 times), the company’s long-term revenue growth rate sits in negative territory. And for that matter, so do all of its profitability margins – gross, operating, and net. For full disclosure, one analyst covers GNUS and assigns it a $12.50 price target, implying 302% upside. For everyone else, it’s arguably one of the stocks to sell.
Marathon Digital (MARA)
A blockchain-mining specialist, when Marathon Digital (NASDAQ:MARA) is on, it’s on like Samuel L. Jackson’s favorite word. And when it’s not on, it can be just like Samuel L. Jackson’s favorite word. Right now, it’s not on. While MARA nearly doubled in value this year, against the trailing year, it’s down a staggering 74%.
To be sure, cryptocurrencies seemed rather buoyant. However, inflation data and the implications of more Fed tightening appeared to have knocked the wind out of digital assets. Per Fintel, Marathon’s short borrow fee increased from 20.95 on Feb. 20 to 22.68 on Feb. 24. While I’m biased for cryptos, I also have to look at the hard numbers. Aside from Gurufocus.com warning about Marathon’s possible value trap profile, it just doesn’t scream confidence. For instance, its Altman Z-Score of 0.12 below breakeven indicates a distressed enterprise. Further, its net margin sits deeply in negative territory. For the believers, MARA carries a consensus moderate buy view with an 80% upside target. However, for by-the-books investors, MARA might be one of the stocks to sell (for now).
Getty Images (GETY)
A visual media company and a supplier of stock images, editorial photography, video, and music for businesses and consumers, Getty Images (NYSE:GETY) represents an important tool for journalists and content creators in general. Sure enough, since the January opener, GETY gained almost 14% of its equity value. However, in the trailing year, it looks more like one of the stocks to sell. During the past 365 days, GETY dropped over 29%. Since making its public market debut, GETY is down over 75%. Per Fintel, Getty’s short borrow fee increased from 95.65 on Feb. 22 to a maximum of 105.52 on Feb. 24.
To be clear, GETY represents a tricky enterprise to judge. On the positive side, it features strong profitability margins. For instance, its net margin stands at 12.74%, beating out over 73% of the competition. On the other hand, it’s overpriced, trading at a trailing multiple of 48.65. As a discount to earnings, Getty ranks worse than nearly 84% of its peers. Interestingly, one analyst covers GETY, pegging it a buy. However, with a $6 price target, it features a 7% downside risk. Thus, it might rank among the stocks to sell.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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