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3 Stocks to Avoid as Inflation Grows More Persistent

Inflation is growing more persistent and entrenched than expected. And the Fed’s aggressive rate hikes to tame inflation are raising the possibility of a recession. Hence it might be best to avoid fundamentally weak stocks, Royal Caribbean Cruises (RCL), Unity Software (U), and Bed Bath & Beyond (BBBY) now. Read more...

August’s consumer price index (CPI) increased 0.1% for the month and 8.3% over the past year. Inflation far from the Fed’s control is indicative of a broad-based problem, and that inflation could be more deep-rooted than previously thought.

The world’s top finance chiefs believe that taming the rampant inflation will take an extraordinary effort and will likely slip the global economy into a recession. While a peak is still months away for the United States, inflation is near double-digit territory in many of the world’s biggest economies.

Amid the Fed’s rate hikes to bring down inflation to its target level, gross domestic product decreased 1.6% in the first quarter and 0.6% in the second quarter of 2022.

As inflation grows more persistent, fundamentally weak stocks Royal Caribbean Cruises Ltd. (RCL), Unity Software Inc. (U), and Bed Bath & Beyond Inc. (BBBY) might be best avoided.

Royal Caribbean Cruises Ltd. (RCL)

RCL operates as a worldwide cruise company. It owns and operates global cruise vacation brands, including Royal Caribbean International, Celebrity Cruises, Azamara, and Silversea Cruises.

On August 18, RCL announced the completion of its private offering of $1.25 billion in aggregate principal amount of 11.625% senior unsecured notes due 2027. The company expects to use the net proceeds from the offering to repay principal payments on debt maturing in 2022 and 2023.

For the second quarter ended June 30, 2022, RCL reported an adjusted net loss of $521.52 million and $2.08 per share. Its operating loss came in at $218.64 million.

The company’s EPS is expected to come in at negative $0.72 in the fiscal fourth quarter ending December 2022. Street expects RCL’s revenue to be $2.70 billion for the same quarter.

RCL’s stock is down 40.3% over the past year and 35.6% year-to-date to close its last trading session at $49.49.

RCL’s POWR Ratings reflect its poor prospects. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

RCL has an F grade for Stability and Sentiment and a D for Value and Quality. RCL is ranked #3 out of the four stocks in the F-rated Travel - Cruises industry.

Click here to see the additional POWR Ratings for RCL (Momentum and Growth).

Unity Software Inc. (U)

U creates and operates an interactive real-time 3D content platform. Its platform provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices. The company serves content creators and developers, artists, designers, engineers, and architects to create interactive and real-time 2D and 3D content.

Earlier this month, Applovin Corp (APP) withdrew its buyout offer for U. This followed U’s rejection of the $17.54 billion all-stock bid from AppLovin last month. U’s shares plunged on the news.

For the second quarter ended June 30, 2022, U’s non-GAAP loss from operations rose by 6351% year-over-year to $44.13 million. Its non-GAAP net loss increased 3862.5% from the previous-year quarter to $53.14 million. The company’s non-GAAP net loss per share grew 1700% year-over-year to $0.18.

Street expects U’s revenue to increase 14.1% year-over-year to $326.58 million in the fiscal quarter ending September 2022. However, the consensus EPS estimate of negative $0.15 for the same quarter represents a decline of 152% year-over-year.

The stock has declined 72.4% over the past year to close the last trading session at $35.20. It has declined 75.4% year-to-date.

U’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system.

The stock has a D grade for Stability and Value. It is ranked #21 in the 22-stock Entertainment – Toys & Video Games industry.

In addition to the above, we have also rated U for Growth, Momentum, Sentiment, and Quality. To see all POWR Ratings for U, click here.

Bed Bath & Beyond Inc. (BBBY)

BBBY operates a chain of retail stores. The company sells a range of domestic merchandise, home furnishings, and other juvenile products. The company owned more than 953 stores as of February 26, 2022, and offers its products through various websites and applications.

On September 15, BBBY reported shutting off more stores, including one in the South Sound. The company had already announced in August that it was closing 150 “low performing” locations stores in an effort to improve performance. The closure of stores could lead to lower sales in the short run.

BBBY’s net sales decreased 25.1% year-over-year to $1.46 billion in the fiscal first quarter ended May 28, 2022. Its operating loss rose 371.9% year-over-year to $339.16 million, while its gross profit declined 44.9% from the year-ago value to $349.31 million. The company’s adjusted net income per share declined 5,760% to a negative $2.83.

Analysts expect BBBY’s EPS to decline 496.2% year-over-year to a negative $1.49 in the fiscal third quarter ending November 2022, while its revenue is expected to decrease 21.9% year-over-year to $1.47 billion in the same quarter.

BBBY has declined 67.8% over the past year and 5.35% intraday to close its last trading session at $7.60. The stock has plunged 65.6% year-to-date.

It’s no surprise that BBBY has an overall rating of D, which translates to Sell in our POWR Ratings system. It has a grade of F for Stability and Sentiment and a D for Growth and Momentum. The stock is ranked #58 out of the 62 stocks in the Home Improvement & Goods industry.

To see the additional POWR Ratings for Value and Quality for BBBY, click here.

RCL shares were trading at $46.63 per share on Wednesday morning, down $2.86 (-5.78%). Year-to-date, RCL has declined -39.36%, versus a -17.70% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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