Last week, I recommended “5 Stocks to Buy as Interest Rates Begin to Fall.” Declining borrowing costs looked set to turn these loss-making firms profitable again – a historically bullish sign for stocks. The five companies also had strong underlying businesses; their lack of profitability was from financing issues, not operational ones.
An unexpectedly hot March inflation report this past week now pushes their turnarounds back several months. Shares of one pick – Opendoor Technologies (NASDAQ:OPEN) – fell as much as 15% on the prospect of rates staying higher for longer. Fortunately, this only delays these companies’ recovery because their underlying businesses remain strong. Monopolistic firms like Sabre (NASDAQ:SABR) and Royal Caribbean (NYSE:RCL) will have no trouble shouldering another several quarters of high-than-average interest payments.
However, not every indebted firm is so lucky. Many high-debt firms are unprofitable enterprises that borrowed money to stay afloat. And their cases, even a two-month delay of interest rate cutting could be enough to push them over the edge.
That’s why our writers at InvestorPlace.com – our free news and analysis website – took a good, hard look at a handful of former high-flying firms this week that are now struggling under their financial weight. It’s a warning that Louis Navellier’s special guest echoes in their latest presentation.
Indeed, if the Fed delays its rate-cutting schedule further as Louis’s special guest expects, be sure to sell these five companies as soon as you can… or avoid them if you haven’t bought their shares yet…
5 Stocks to Sell Immediately: Fisker (FSRN)
Eddie Pan examines what went wrong at Fisker (OTCMKTS:FSRN). In a detailed report at InvestorPlace.com, he finds that Henrik Fisker’s second company – Fisker Automotive, which declared bankruptcy in 2013, was the first – is now at risk of imploding:
First, it’s hard to miss the extremely competitive EV landscape that has witnessed a multitude of headwinds during the past few years, including supply chain issues, price wars, and a higher cost of borrowing. Making matters worse, Fisker was dealing with its own internal issues at the same time.
In its preliminary fourth quarter earnings, the company announced a 15% workforce reduction, a delayed Form 10-K, and an impending going concern warning following the submission of its 10-K. Fisker produced 10,193 Oceans in 2023 and delivered only 4,929 of them, signaling a clear demand problem.
Essentially, Fisker is building cars that too few buyers want. Clownishly negative reviews of Fisker Ocean have recently gone viral on social media, leading to widespread order cancellations of Fisker’s flagship vehicle. The company has now cut MSRP prices on its Ocean Extreme from $61,499 to $37,499.
That’s probably too little, too late. Fisker’s most recent balance sheet showed just $326 million of cash left on hand, or less than four months of liquidity. And high borrowing costs means it must turn to increasingly onerous financing deals to keep itself alive, such as a $150 million convertible note issuance in March. Its 2026 bonds now trade at 1.5 cents on the dollar.
Though Fisker began with a solid concept of bringing affordable e-SUVs to American buyers, its financing and operational issues mean our writers believe it’s time to sell whatever you might have left.
2. Lucid Motors (LCID)
Our writers have also turned bearish on Lucid Motors (NASDAQ:LCID), once considered the most likely company to beat Tesla (NASDAQ:TSLA) at its own game. A beautiful car design and deep backing by the Saudi sovereign wealth fund meant that the car firm had a long runway to reach scale.
However, the wealth fund has since found Lucid Motors to be a bottomless money pit. The company has lost $6.7 billion since 2021, and won’t become profitable until at least 2026, if it ever does at all. Its most recent debt funding round valued shares at just $3.60.
Dwindling financing options could hardly come at a worse time, as Terel Miles bluntly puts it at InvestorPlace.com:
Lucid’s hunger for capital is no secret at this point. The company has been burning through cash at an alarming rate to fund its expansion plans.
It has gotten to a point where it’s not if but when the company will raise more capital and dilute shareholders. Their access to capital and number of high-profile investors has been the company’s kryptonite.
That’s made Lucid’s debtholders increasingly wary. Lucid’s 2026 convertible debt now trades at 51 cents on the dollar, down from par as recently as 2022. That essentially blocks the EV startup from issuing any more debt, because no reasonable investor would buy debt at face value.
Lucid also suffers from its unusual exposure to a Residual Value Guarantee program, which promises to reimburse its vehicle lessors for losses in resale value. High car loan rates and EV oversupply has pushed companies like Tesla to slash prices, driving down the values of used vehicles. Though these contracts only contributed to $28.7 million of Lucid’s 2023 losses, their existence means further declines in EV values not only hurts new sales. Losses will extend to old sales as well.
3. Hertz (HTZ)
Three years ago, I wrote why Hertz Global (NASDAQ:HTZ) could become the top penny stock of 2021. The company’s large asset base (in the form of its rental fleet) and exposure to the Covid-19 pandemic bizarrely meant that the longer the company spent in bankruptcy court, the better the chance of its ultimate survival.
The results were fantastic. By the end of the year, the pandemic had begun to recede, driving up used-car prices and sending Hertz’s stock up tenfold.
However, poor financial decisions have since turned me and other InvestorPlace.com writers bearish about the company’s underlying asset value. In January, the car rental firm announced it was taking a $245 million hit to its earnings from a poorly placed bet on EVs. Its CEO would be forced out by March. Hertz also failed to use its post-bankruptcy windfall to pay down its debts. Its total liabilities today are over twice as high as when I first covered the stock.
Here’s what Louis Navellier and his team now say about this once-promising turnaround.
Following the Covid-19 lockdowns that crippled the auto rental industry, Hertz bet big on EVs, hoping that the fleet would be appealing to customers. But when Tesla cut prices on its cars across the board and other EV makers followed suit, Hertz was left with a high-priced fleet with a much weaker resale value.
Now that CEO Stephen Scherr stepped down, investors may be tempted to give Hertz another chance to get it right. But I don’t recommend it. HTZ stock is down 26% in 2024 and gets an “F” rating in the Portfolio Grader.
Debt markets are equally wary. Moody’s now assigns Hertz a B3 rating on its senior note, which historically suggests a 26% chance of default over the next 10 years. Buyer beware. A strong brand name means little when debts are piled this high.
4. Spirit (SAVE)
When the U.S. Justice Department blocked a merger between Spirit Airlines (NYSE:SAVE) and JetBlue (NASDAQ:JBLU) in March, InvestorPlace.com writer Eddie Pan warned that it could cause Spirit to file for bankruptcy and liquidate assets. Spirit is a historically unprofitable airline, and it’s increasingly unlikely that it can turn a profit as a standalone company.
Rising financing costs now threaten to end Spirit’s run within a year. Prices of its 2025 convertible debt have fallen from par at the start of the year to trading at roughly 45 cents on the dollar. S&P Global has now downgraded Spirit’s credit rating to “CCC+,” giving a 3-year default probability in the 20%-30% range.
Ian Bezek goes a step further at InvestorPlace.com, calling the struggling airline a “walking dead company to avoid:”
Unfortunately for Spirit, it finds itself in a weak position as an independent airline. The airline has been losing money, and it currently has significant capacity constraints due to engine defects that grounded a chunk of its fleet. In addition, the surging oil price will cause Spirit problems with jet fuel costs going forward.
Essentially, the company is running out of any financing options. Spirit already spends $130 million in interest payments annually, and its roughly $300 million in expected annual losses will increase this figure by $45 million annually through 2026, according to Wall Street analysts. Though its $4.40 shares look “cheap” on certain valuation metrics, Spirit’s onerous financing costs means the stock will unlikely survive for much longer.
5. SunPower (SPWR)
Finally, solar financing stocks will likely underperform as long as rates stay high. These companies rely on cheap borrowing rates to offset the large upfront installation costs, and elevated interest rates make large projects less attractive. Residential customers are particularly sensitive to these changes, since the viable alternative (of using grid energy) already exists.
The most notable of these residential solar suppliers set to fail is SunPower (NASDAQ:SPWR), a company Jeremy Flint recently called a sell at InvestorPlace.com:
The residential rooftop solar sector is notoriously difficult to penetrate, with tons of high-quality companies competing for an increasingly shrinking pool of interested homeowners. At the same time, high upfront and financing costs are cutting into sales across the industry. Both factors are pushing SunPower’s stock down and, staking claim to less than 1.5% of the total existing market, SunPower has a long way to catch up to top competitors
That’s because SunPower was already weak to start. In 2022, the firm earned just $58 million net income on $1.7 billion of sales. The firm would lose $160 million the following year, and management believes it will lose another $120 million this year. Tesla’s energy generation and storage segment generates gross profits a third higher.
Other solar firms have also struggled. Louis cut his remaining stake in Enphase Energy (NASDAQ:ENPH) last November to book a 54% total gain (subscription to Accelerated Profits required). A resurgence in cheap Chinese imports is also harming Western panel makers.
But according to my analysis, SunPower’s precarious start makes it the most likely solar company to fold within the next three years. Flint is right: In this new rate environment, it’s better to bet on the top competitors than the stragglers.
The Cost of Debt Keeps Going Up
The average S&P 500 firm has now seen its cost of debt rise 9.3% since the start of 2024, according to estimates from Thomson Reuters. Though the U.S. Federal Reserve hasn’t raised its benchmark rate since last August, all firms must eventually roll low-rate borrowings into higher-rate ones as loans mature.
That can have disastrous effects, especially on highly leveraged firms. Spirit Airlines, for instance, has $1.1 billion in bonds due next year. It will either need to find a willing suitor or sell enough of itself to make up the difference. Shareholders will face significant dilution.
Even healthy firms can see their share prices fall, as high-flying firms like Nvidia (NASDAQ:NVDA) have recently shown.
That’s why Louis has teamed up with a special guest for the Election Shock Summit. During that event, they show us what to do before we learn, on May 1, that there may be no rate cuts any time soon. This is going to usher volatility back into the market of the sort we haven’t seen in years.
Plus, they’ll show you how to access a new system that lets you get ahead of big “unpredictable” political, economic, and financial moves before they happen.
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Thomas Yeung held a long position in SABR. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.