The stock market breathed a sigh of relief last week when June’s inflation numbers came out. The Consumer Price Index fell 0.1% for the month, the first time inflation fell in four years. It signaled the Federal Reserve might cut interest rates, possibly as soon as September.
Until then, things had been looking bleak with cuts not coming until December or even next year. But the more hopeful outlook ignited a rally amongst stocks that were hit hard by the Fed’s unprecedented rate increases.
Yet there is still the possibility that the central bank could still hold the line on interest rates. If inflation rears up again over the next two months the Fed could delay action, sinking interest rate-weary sectors. That makes the following three companies stocks to sell if the Fed doesn’t cut rates as expected.
D.R. Horton (DHI)
Home builders have proved remarkably resilient since interest rates soared to 40-year highs. Although they should have cratered long ago, they have actually outperformed the S&P 500 over the past two years.
That’s because high rates caused existing homeowners to hold onto their low-interest rate mortgages. No one wants to trade in their 2% or 3% mortgages for ones that are currently north of 7.5%. But with the demand for houses high, it has allowed builders to keep building. Falling rates could put more existing homes on the market.
D.R. Horton (NYSE:DHI) is one of the largest homebuilders and has the most to lose. While first-quarter results beat expectations, the backlog of sales orders of homes under contract fell. Backlog was down 7% to 17,873 and the value of the homes for sale fell 5% to $7 billion.
Shares of D.R. Horton were down 10% year-to-date prior to the inflation report. Now they are up 1%. If we see a spike in inflation again, and the Fed fails to cut rates, DHI is a stock to sell.
SolarEdge Technologies (SEDG)
The residential solar industry is another sector wrecked by the Fed’s policies. Because the cost of financing the installing of new systems became prohibitively expensive, sales of residential solar panel systems cratered. Especially in California where the market contracted between 66% and 83% last year (though the state had special conditions that made it worse than the rest of the country), market analysts at Wood Mackenzie forecast the industry to contract another 12% this year.
That has made it hard on residential solar inverter manufacturers. SolarEdge Technologies (NASDAQ:SEDG) is the second-largest inverter maker behind Enphase Energy (NASDAQ:ENPH) and its stock collapsed 71% over the last six months. Enphase was down 22% prior to the good news on inflation. Both stocks shot higher afterward, rising 16%. But if the Fed fails to cut rates because inflation proves more dogged than expected, SolarEdge becomes a stock to sell.
Titan Machinery (TITN)
Small-cap stocks are yet another segment of the market hit hard by Fed policies. Because small companies have limited access to financial resources, high interest rates raise borrowing and debt costs. They find it difficult to invest in their business to grow.
Similarly, their customers also face high hurdles to financing. That is the case with Titan Machinery (NASDAQ:TITN), a manufacturer of heavy farm and construction equipment. The company has struggled to make sales as farmers are delaying purchases, causing dealers to carry less inventory, so they’re not the ones paying higher rates.
Titan reported that although agriculture sales rose in the first quarter, “revenue growth was limited by softening of demand for equipment purchases due to the expected decline of net farm income this growing season.” As farm income falls, buying new, expensive equipment gets pushed to the back burner.
TITN stock is down 44% in 2024, though it did bounce 5% higher on the inflation report. Titan Machinery is a stock to sell if interest rate cuts aren’t in the cards.
On the date of publication, Rich Duprey did not hold (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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.