7 Stocks to Dump as Warren Buffett Sounds Economic Alarm

When legendary investor Warren Buffett speaks, people listen, which might not bode well for those exposed to the below stocks to sell. Primarily, Buffett believes that the “extraordinary period” of excessive spending following the Covid-19-inspired stimulus package is over. Now, businesses must face certain harsh realities.

In particular, companies directly exposed to the consumer market may face inventory buildup. Eventually, if circumstances don’t substantively improve, they’ll need to rid themselves of this excess through promotional sales. Of course, that will cut into profitability. As well, the broader decline in consumer confidence will likely affect embattled enterprises of other sectors. Therefore, investors should keep a close eye on the below stocks to sell.

Stocks to Sell: Gap (GPS)

Fashion apparel maker Gap (NYSE:GPS) hasn’t had a great start to the year. Actually, it’s been downright terrible. Since the Jan. opener, GPS lost more than 30% of its market value. Over the past 365 days, GPS fell down nearly 35%. Fundamentally, with the Generation Z demographic not placing as much emphasis on fashion compared to older cohorts, Gap lacks distinction.

Financially, Gap seems to be racing against time, making GPS one of the possible stocks to sell. On the balance sheet, Gap’s equity-to-asset ratio sits at 0.2, ranked worse than 83.21% of companies in the cyclical retail industry, per investment resource Gurufocus. As well, its Altman Z-Score comes in at 1.96, straddling uncomfortably close to the line that separates the gray zone from distressed.

Operationally, Gap’s three-year revenue growth rate lands at 0.6% below zero. Its EBITDA growth rate during the same period is 24.3% below breakeven. Combined with a negative trailing-year net margin, GPS makes a case for stocks to dump.

Stocks to Sell: Nautilus (NLS)

When competitors suffer woeful troubles, you must pounce on the opportunity, as cynical as that sounds. It’s all part of gamesmanship. That’s why it’s so disappointing that exercise equipment manufacturer Nautilus (NYSE:NLS) didn’t gain any ground on the recall issue hampering rival Peloton (NASDAQ:PTON). For the year, PTON slipped 14%. In contrast, NLS gave up nearly 26% of equity value. Frankly, it’s one of the stocks to sell for that reason alone.

According to Gurufocus, Nautilus might be a possible value trap. It’s not hard to see why. Currently, the market prices NLS at a trailing multiple of 0.11. On paper, Nautilus ranks better than nearly 99% of the competition. However, a multiple that low might not be sustainable moving forward in the post-pandemic environment. Looking at the balance sheet, I’m more convinced that NLS ranks among the stocks to dump. For one thing, Nautilus carries higher debt than it really should. As well, its Altman Z-Score sits at 1.18, indicating conspicuous distress.

Stocks to Sell: Carvana (CVNA)

Outside any other context, online auto retailer Carvana (NYSE:CVNA) might seem a sterling buy. Since the beginning of this year, CVNA gained nearly 127% of its equity value. However, the framework deceives. For instance, on the May 12 session, CVNA tanked more than 12%. At least part of the reason why Carvana shares skyrocketed this year centers on short-squeeze speculation.

However, as my former InvestorPlace colleague Vince Martin used to say, at some point, the fundamentals matter. For me, Carvana suffers from a serious pricing problem that traditional dealerships – and private-party transactions – don’t have to deal with higher rates in exchange for convenience. Bluntly speaking, no one’s scared of Covid-19 anymore. Therefore, charging people extra (in the form of comparatively higher car prices) for home deliveries won’t cut it. Also, its financials present problems. Its trailing-year net margin sits at 11.7% below zero. Also, its Altman Z-Score is 0.64, indicating significant distress. Along with a very high debt load relative to cash, CVNA ranks among the stocks to sell.

Rivian Automotive (RIVN)

When Rivian Automotive (NASDAQ:RIVN) entered the electric vehicle scene, I personally rooted for it. Having seen them up close and personal on our roadways, my opinion is that Rivian EVs are absolutely gorgeous. Plus, they provide much-needed competition to Tesla (NASDAQ:TSLA), which apparently took cues from Porsche about recycling designs over and over and over…

Unfortunately, as brilliant as Rivian may be on the road, RIVN simply stinks in the chart. Since the Jan. opener, shares tumbled almost 26%. In the trailing one-year period, they’re down nearly 52%. Since making its public market debut till the time of this writing, RIVN dropped 90%. So, in the spirit of keeping it real, RIVN is one of the stocks to sell. To be fair, you can’t blame Rivian entirely for its troubles. A brewing price war means that the company may have to fight a war of attrition. Sadly, I’m not sure that with bleeding margins, RIVN can jump higher in the near term. For now, it’s one of the stocks to dump.

PacWest Bancorp (PACW)

Unless you’ve deliberately turned off the news since March, you know that regional banks face a significant credibility crisis. Up to this point, three banks have failed so far this year. Unfortunately, a few other banks could join this ignominious list. One possible name could be PacWest Bancorp (NASDAQ:PACW). To be 100% clear, PACW could rise higher. But if I had to guess, it’s one of the stocks to sell.

Irrespective of its financial position – which is poor – PacWest faces an ugly dilemma. And to be fair, it’s not necessarily its fault. Amid the three bank failures, the U.S. government made clear that it will protect depositors. It will not protect shareholders of collapsed institutions. Of course, this circumstance translates to PACW stakeholders holding an incredible amount of risk.

At any moment, irrespective of management’s efforts to calm investors’ nerves, PacWest could fail. Sadly, this situation leaves its shareholders in an extremely precious position. Therefore, PACW ranks among the stocks to dump.

LoanDepot (LDI)

A nonbank holding company that sells mortgage and non-mortgage lending products, LoanDepot (NYSE:LDI) seemed reasonable speculation when Uncle Sam injected the economy with cheap money. But as the Oracle of Omaha stated, the U.S. government turned off the monetary spigot. In turn, we have a higher interest rate environment. So, it’s best not to overcomplicate the argument: LDI ranks among the stocks to sell.

Primarily, two factors work against LoanDepot. First, higher borrowing costs make mortgage accessibility much more difficult, particularly for first-time homebuyers. Therefore, it’s no surprise that LoanDepot’s three-year revenue growth rate now sits at 4% below zero. Essentially, the company’s total addressable market diminished.

Second, higher interest rates tend to spark a deflationary dynamic; that is, fewer dollars (due to monetary tightening) chase after fewer goods. In other words, we could suffer a recession. Under such a scenario, LoanDepot wouldn’t exactly be a stellar investment. Thus, LDI represents one of the stocks to dump.

Signet Jewelers (SIG)

Before I get any hate mail about Signet Jewelers (NYSE:SIG), at the moment, its financials seem fine. If anything, an argument could be made that SIG is undervalued. Right now, the market prices shares at a forward multiple of 6.39. As a discount to earnings, Signet ranks better than 91.58% of the competition. So, why mention SIG as one of the stocks to sell?

Up a bit over 9% for the year, it beats the benchmark equities index. However, some questions have arisen that cloud Signet a bit. Specifically, in April, a CNN report noted that Signet disclosed that the Covid-19 crisis “…dented sales of engagement rings as relationships faltered or never even blossomed in the first place due to the lockdowns.”

More recently, Signet sees a dramatic decline in dating. Therefore, this circumstance created “an engagement gap.” Again, the financials at the moment don’t show any glaring signs of distress. Overall, Signet features a solid balance sheet. Also, it remains a profitable enterprise. However, continued impact in the romance scene could spell trouble for SIG.

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.