On the surface, it may seem odd that many of the stocks to sell before interest rates fall are the same type of stocks typically recommended as stocks to buy before interest rates fall. However, there is a reason for this.
Although the Federal Reserve has yet to reverse on its plans to reverse course on monetary policy (i.e. lower interest rates) in 2024, the latest statements from Fed Chairperson Jerome Powell suggest that the so-called “Fed pivot” will not entail an aggressive cutting of interest rates back to pre-hike levels.
Instead, Powell’s statements signal that the “Fed” could take a “prudent” approach to cutting interest rates. This prudence is not an issue. In fact, it may be the best way to bring down interest rates without triggering a second wave of high inflation.
However, with the markets booming since November, due to “rate cut mania,” the prospect of rates actually staying at elevated levels longer than currently expected may have a disastrous impact on stocks. In particular, stocks that have experienced strong rallies due to this catalyst.
That’s the situation here, with these seven stocks to sell before interest rates fall.
Many factors have contributed to Carvana’s (NYSE:CVNA) stunning stock price rebound since 2023.
These include the online automotive retailer’s avoidance of financial disaster through a debt reduction deal, several waves of short-squeezes, as well as the aforementioned prospect of lower interest rates.
With the interest rate catalysts, the perceived benefits for CVNA stock are twofold. Lower interest rates are a positive for speculative growth stocks. They are also a positive for used car demand, as vehicle purchases are typically financed with debt.
However, if rates stay “higher for longer” in 2024, investors could begin to have second thoughts about the Carvana comeback.
The company has made material progress with its turnaround. Even so, if high rates stymie Carvana’s growth resurgence plans or cause renewed concerns about its still-high level of debt ($6 billion), this stock (up eightfold from its 52-week high) could reverse course in a big way.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is a real estate investment trust, or REIT, specializing in the ownership of properties leased by state-licensed cannabis cultivators.
Like more mainstream REITs, IIPR shares were hammered by the rate hikes, yet have been bouncing back since “rate cut mania” first took shape last fall.
However, as rates may not come down so quickly, REITs have coughed back recent gains. IIPR has only pulled back moderately, but if rates remain high, it could fall back towards its 52-week low ($63.36 per share, versus $91.50 per share today).
Irrespective of the interest rate-related reasons to be cautious about Innovative Industrial Properties, there’s also the fact that this REIT faces the prospect of declining revenue and funds from operations, or FFO (the REIT equivalent to earnings). Forecasts call for FFO to drop from $8.20 to $8.13 per share this year.
Annaly Capital Management (NLY)
Mortgage REIT Annaly Capital Management (NYSE:NLY) is another stock with high levels of interest rate sensitivity. Hence, making it one of the stocks to sell before interest rates fall much later, and possibly at a more modest pace, than currently expected.
As has been par for the course with mortgage REITs, rate hikes have resulted in squeeze net interest margins and portfolio losses for Annaly. This, in turn, has led to big price declines for NLY stock.
Even after bouncing back on rate cut news, shares remain down by more than 50% compared to what shares traded for during the height of near-zero interest rates.
However, if high rates persist, negative net interest margins will persist as well. Unrealized accounting gains (as reported last quarter) could also reverse course. While NLY’s 13.82% forward yield is tempting, a stock price pullback may outweigh this benefit.
Realty Income (O)
Rate cut enthusiasm sparked a strong rally for Realty Income (NYSE:O) between November and early January. Investors bid up this triple net lease-focused REIT from the mid-$40s to nearly $60 per share.
Since then, however, interest rate uncertainty has knocked O stock partially back to pre-November price levels. Further declines may lie ahead. If the Fed funds rate remains in the low-to-mid single-digits, this may dampen the appeal of O’s steady but only moderately-high 5.79% forward yield.
Although the expected accretion to earnings from Realty Income’s recently-closed merger with Spirit Realty Capital could somewhat counter higher-for-longer headwinds, it may be best to stick to the sidelines for now with this monthly income stock.
This REIT could potentially re-test its 52-week low, creating a much opportune entry point for entering a long-term position.
Opendoor Technologies (OPEN)
As lower interest rates could spark a housing rebound, it’s no surprise that Opendoor Technologies (NASDAQ:OPEN) shares bounced back with a vengeance during the November-to-January “rate cut mania” time frame.
OPEN stock during this time more than doubled in price. However, with aggressive rate cuts now seen as hardly a done deal, investor enthusiasm about this residential iBuyer (or large-scale house flipper) has softened.
Worse yet, after partially falling back, OPEN (at around $3.33 per share today) could fall fully back to early November prices (around $2 per share).
Shares continue to dip because of growing pessimism about a renewed housing boom. As a Seeking Alpha commentator pointed out last month, Opendoor’s business model could be “fundamentally flawed,” with profitability out of reach even if macro trends normalize.
With all of this in mind, if you own OPEN, now’s the time to close out your position.
Tesla (NASDAQ:TSLA) shares have pulled back, because of uncertainty over the EV maker’s near-term growth and profitability prospects.
Interest rate policy plays somewhat of a role in this. If rates stay high, EV demand growth could remain under pressure.
This suggests further disappointment ahead with this EV market leader’s operating performance. Causing TSLA stock (down by nearly 24% year-to-date) to continue declining in price.
High rates, plus slowing growth, may also lead to investors questioning with this automaker deserves a valuation leaps and bounds ahead of that of its incumbent automotive competitors.
That’s not to say TSLA will start trading at a single-digit forward multiple. That’s the current valuation of “old school” auto stocks like Ford (NYSE:F).
Still, as I recently argued, the stock could still experience enough multiple compression to send this $190 per share stock back down to between $100 and $125 per share.
High-yield dividend stocks are another category of equities sensitive to interest rate changes.
While not certain, it’s possible that the perceived prospect of lower interest rates has been a big factor in putting and keeping AT&T (NYSE:T) shares on an upward trajectory over the past few months.
However, if it becomes more likely that rate cuts aren’t going to happen at a rapid pace, this could spell doom for T stock. Since last month, bullishness for “Ma Bell” has waned, due to negative developments like a poorly-received quarterly earnings release.
Unless the Fed declares “full steam ahead” with aggressive rate cuts, concerns about AT&T’s fundamentals may start to really outweigh the appeal of its 6.6% dividend. As a retreat to prior lows may outweigh this rate of payout, consider T to be one of the stocks to avoid before interest rates fall later rather than sooner.
On the date of publication, Thomas Niel 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.