7 Stocks That Could Take a Hit as Consumers Curtail Spending

Though the Federal Reserve’s aggressive actions against skyrocketing inflation delivered results, it may not be enough to spare all companies in the consumer discretionary space. Thus necessitating a discussion about stocks to sell. Keep in mind that this narrative doesn’t center on hating or bashing affected enterprises. Rather, investors just need to appreciate certain realities.

It also doesn’t mean that you should dump all your holdings on the identified stocks to sell, particularly if you have good reason to believe in their viability. I’ll be the first to admit that I don’t get it right all the time. However, unfavorable economic factors relating to consumer sentiment make certain enterprises riskier than others. Plus, any good investor seeking long-term success will need to reevaluate their position from time to time. Perhaps now would be a time to consider challenged stocks to sell.

Stocks to Sell: Nordstrom (JWN)

On paper, Nordstrom (NYSE:JWN) doesn’t immediately strike investors as one of the stocks to sell. For instance, investment resource Gurufocus.com labels shares modestly undervalued based on its proprietary calculations for fair market value (FMV). Objectively, the market prices JWN at a forward multiple of 11.89. As a discount to earnings, Nordstrom ranks better than 67.31% of the industry.

So, what gives? Fundamentally, if consumer sentiment continues to stay deflated against historical norms, Nordstrom may be in trouble. Let’s face it – people don’t necessarily need the products the luxury department store sells. Rather, they want it. However, people also want to put food on the table and they definitely need that. Therefore, JWN could be one of the stocks to sell if consumers limit their spending. Also, Wall Street analysts don’t have a great view of JWN, pegging it a consensus hold. In addition, their average price target sits at $18.14, implying nearly 17% downside.

Stocks to Sell: Dillard’s (DDS)

As with rival Nordstrom, Dillard’s (NYSE:DDS) might not immediately seem like one of the stocks to sell. For one thing, the market prices shares at a trailing multiple of 8 times. As a discount to earnings, Dillard’s ranks better than 82% of its peers. Also, the company features a rock-solid balance sheet. Combined with operational strengths (robust revenue growth, outstanding profit margins), DDS could swing higher.

At the same time, Dillard’s faces the same fundamental challenge as Nordstrom: people don’t necessarily need the products Dillard’s offers. To be fair, DDS represents a stunner of a chart performer, gaining 28% since the January opener. In the trailing year, it’s up 67%. However, if headwinds such as mass layoffs impact consumer sentiment, DDS could come down in a hurry.

Also, JPMorgan Chase’s Matthew Boss isn’t a fan of DDS, rating it a “hold” recently. Also, the analyst targets shares dropping to $345, implying greater than 15% downside risk. To be sure, positive hedge fund sentiment for DDS contradicts Boss’ pessimism. Again, though, it’s all about what the consumer will bear.

Stocks to Sell: Swatch (SWGAY)

A Swiss manufacturer of watches and jewelry, Swatch (OTCMKTS:SWGAY) commands significant marquee value in the global consumer discretionary space. While the company carries the modest brand name of low-cost watches, it also commands an enviable portfolio. Global brands like Tissot, Longines, Blancpain, and Omega – and many, many others – sit beneath the Swatch umbrella.

Not too long ago, the parent company made the decision to manufacture the Moonswatch collection, combining the Omega Speedmaster model name with Swatch’s modest quality and pricing. In other words, customers can get a “Speedy” for hundreds of dollars instead of thousands of dollars. While I can’t speak for all horologists, I think this represents a distasteful example of brand dilution. You’re never going to see Rolex manufacture a cheap Daytona or Submariner for the masses. No, you want a Rolex, you better earn a Rolex. Unfortunately, Swatch’s misguided decision may impugn the Omega brand.

Also, note that Swatch only beat its earnings per share and revenue estimates half of the time during the past 12 months. If consumer sentiment takes a hit, SWGAY may be one of the stocks to sell.

RH (RH)

A manufacturer of upscale home furnishings, RH (NYSE:RH) represents a premium player in the consumer discretionary space. As with the top two names, RH doesn’t immediately strike investors as one of the stocks to sell. For example, the market prices RH at a trailing multiple of 12.05. As a discount to earnings, RH ranks better than 62.2% of its peers. Also, the company enjoys operational strengths relative to its industry.

Admittedly, then, a danger exists in considering RH as one of the stocks to sell. That’s especially true if you’re looking to short (I probably wouldn’t do that though). However, the Fed’s monetary tightening campaign spiked benchmark interest rates. In turn, this hurt housing market sentiment due to additional affordability constraints associated with higher borrowing costs. By logical deduction, consumers may not be gung-ho about furniture, especially premium furniture.

To be fair, RH carries a consensus view of moderate buy. However, it’s a very split opinion: eight buys, eight holds, and one sell. If the Fed continues to hike rates – something that might happen due to a strong overall labor market – then RH may face headwinds.

Vroom (VRM)

Fundamentally, I shouldn’t receive too much flak for identifying Vroom (NASDAQ:VRM) as possibly one of the stocks to sell. As a used-car retailer specializing in online car deliveries, it basically competes with Carvana (NYSE:CVNA). Of course, the problem with that is simply Carvana’s business looks like a word I can’t say here. On a year-to-date basis, VRM hemorrhaged nearly 83% of equity value. On the flip side, CVNA fell a staggering 91% exactly. Frankly, we’re not dealing with a full deck here.

Nevertheless, I don’t consider every name in the automotive sector as stocks to sell. Far from it; I mentioned many times that the average age of vehicles on U.S. roadways hit a record 12.2 years. Therefore, people will need to replace their cars eventually. So, car demand isn’t the issue. Rather, the challenge for Vroom is that it imposes a service premium that simply doesn’t exist for brick-and-mortar used-car dealerships. Therefore, VRM just screams stocks to sell.

Starbucks (SBUX)

As with many other stocks to sell on this list, Starbucks (NASDAQ:SBUX) doesn’t immediately strike investors as a particularly bearish entity. Sure, SBUX trades at a forward multiple of 31.62, which rates as overvalued relative to the industry. However, it features a three-year revenue growth rate of 9% and a net margin of 10%. Both stats ping in the upper echelon of the underlying sector.

So, why even bother listing SBUX as one of the stocks to sell? Early last year, Starbucks hiked prices, naturally blaming inflation. To be sure, it didn’t negatively impact sentiment as the prior operational stats suggest. If anything, people continued to pile into its stores.

I’ve got to be honest, Starbucks carries such high customer loyalty that this could go either way. However, if we’re talking about consumers tightening their belts, then Starbucks faces risks. After all, with the combination of elevated inflation and rising layoffs, something’s got to give.

Ruth’s Hospitality (RUTH)

On the last name for this list of stocks to sell, we have Ruth’s Hospitality (NASDAQ:RUTH). Again, on paper, Ruth’s doesn’t appear a candidate for a bearish take. First off, the market prices RUTH at a trailing multiple of 15. As a discount to earnings, Ruth’s ranks better than over 78% of the competition. As well, it features a net margin of 8.1%, outpacing 81.58% of its rivals.

Nevertheless, if we’re talking about rising consumer pressures, then Ruth’s presents serious concerns. Namely, the company stands at the top of the trade-down effect. As a premium operator of fine-dining establishments (Ruth’s Chris Steak House), it’s easy to trade down to a cheaper alternative. For instance, you might opt for a more reasonable experience at Red Lobster. Now, Ruth has been a strong performer in terms of growth, I’ve got to be clear about that. However, if consumer pressures continue to build, it’s going to be extremely difficult to justify Ruth’s. Therefore, it’s a name to be extremely careful about.

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.