2023 Investing Preparation: Stocks That Shouldn’t Be in Any Portfolios (Part 2)

By TradeSmith Research Team

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Editor’s Note: Last week, Senior Analyst Mike Burnick shared three stocks that he wants to make sure aren’t in any of your portfolios in 2023. Today, he’s following up with two more stocks to stay away from. You can access Part 1 here.

On the surface, a bear market seems to be all about the fear of watching the hard-earned money you invested into a company trickle away drop by drop.

But if you dig a little deeper, there’s something else that makes a down market even more jarring: the necessity for changing your tactics to suit the new environment.

A lot of investing strategies over the past decade are now completely irrelevant with inflation above 8%, interest rate hikes, a troubled housing market, supply chain bottlenecks, and much more.

You can no longer buy a tech stock and just expect the stock price to go up.

You can no longer “set it and forget it” with any of your investments.

Basically, you can no longer be passive when it comes to protecting your financial future.

Taking control of your financial health is what I’m focusing on today. With 2023 right around the corner, I want to make sure there aren’t any losing stocks lurking in your portfolio.

Robin Sharma, the author of “The Monk Who Sold His Ferrari,” said something about exercise that applies perfectly to investing.

It’s easy to put exercise off to the side and say you’ll get around to it later. But the more you keep putting it off, the bigger health issues you may have down the road.

With investing, the longer you put off moving on from your losers, the more damage control you’ll have to do when your losses keep stacking up.

In Part 1 of this series, I shared that AMC Holdings Inc. (AMC), Whirlpool Corp. (WHR), and Tractor Supply Co. (TSCO) are all stocks to steer clear of.

In the second and final part of this series, I’m going to share two more companies to avoid.

Let’s jump right in…

Stocks That Shouldn’t Be in Any Portfolios, No. 4: Colgate-Palmolive Co. (CL)

You probably have at least one product from Colgate-Palmolive in your bathroom or kitchen right now.

This is the company behind cleaning and personal care brands such as Colgate, Palmolive, Speed Stick, Irish Spring, Ajax, Tom’s of Maine, and more.

At first glance, this would appear to be a classic defensive stock to own during an economic downturn, as people still need to buy toothpaste, deodorant, soap, shampoo, and kitchen cleaning products.

Colgate is also what I call a “Pay Me Now” stock, a company that is generating money in the here and now and passing its revenue on to shareholders as dividend payments. Colgate is a Dividend Aristocrat, having increased its dividend for more than 25 consecutive years.

It has a yield of 2.75% as of this writing.

But looking beyond that reveals that this is clearly a stock to avoid.

Colgate-Palmolive has issues with raw material costs. For 2022, the company expects that raw material inflation will cost it $1.3 billion.

And the problem is, there is only so much more the company can raise its prices to try to pass on expenses to the consumer. CEO Noel Wallace shared in January that, given the increased prices of its products, “you will see a fall off in volume.”

Again, higher prices can only offset a decline in the number of products being sold for so long before people become unwilling to buy them.

For example, you can buy 40 ounces of Great Value dish soap at Walmart for $2.84.

In comparison, 32.5 ounces of Palmolive dish soap costs $1.14 more at Walmart, giving a customer less product while also costing them more money.

With inflation staying so high, most people aren’t going to bat an eye about changing dish soap brands, and in the event of a recession, the Harvard Business Review reported that consumers have less brand loyalty and are inclined to settle for alternatives.

Adding to the unappealing narrative around Colgate-Palmolive, our Health Indicator classified CL as a stock to stay away from, putting it into the Red Zone on Sept. 30.

If you own or were planning to own CL for the dividend payout, I have better options for you here.

Stocks That Shouldn’t Be in Any Portfolios, No. 5: PNC Financial Services Group Inc. (PNC)

PNC is a banking stock able to lure investors because they assume higher interest rates are good for banks — and because PNC pays a dividend yield of 3.98% as of this writing.

Banks can earn more money through lending at higher interest rates, and PNC reported in its last quarter that net interest income (what’s left over from the interest the company earns from mortgages, commercial loans, and securities after paying interest-bearing customer deposits), increased from the previous year because of higher-interest-earning assets. But there comes a point when rates rise to a level that folks are less willing to borrow at.

Case in point: the slowdown in housing.

One in five home sellers had to drop their asking price in August, as 30-year mortgage rates have been increasing and pricing people out of buying homes. In perfect time for the upcoming Halloween season, the 30-year mortgage rate averaged 6.66% for the week of Oct. 3, which is more than double what it was last year.

When interest rates stay high, people just sit on the sidelines and don’t borrow money to buy a home, which means the bank loses out on a revenue opportunity from interest and fees.

And if we head into a recession, it will get even worse.

People will lose their jobs, they won’t be able to pay their bills, and banks will have a surge in loan losses.

While PNC was able to make it through the last recession better than some other financial firms, the stock price was down 8.27% for the year in 2007 and was down 22.18% for the year in 2008.

Profit growth is set to decelerate in 2023 due in part to the slowdown in housing and increased capital costs from rising interest rates and inflation. These factors could easily result in sharply lower demand for lending next year.

Turning once again to our Health Indicator, PNC is in the Red Zone, and on top of that, it’s considered a high-risk investment, with a Volatility Quotient of 31.13%.

VQ Level Breakdown:

  • Up to 15% = Low Risk
  • 15%-30% = Medium Risk
  • 30%-50% = High Risk
  • 50% and above = Sky-High Risk
The dividend payout may seem nice now, but it won’t make up for the losses you’ll incur if you keep PNC in your portfolio.