Rewind a few weeks ago and the general consensus was much more optimistic regarding potential rate Cuts in March. then the Federal Reserve all but shut down that notion after unanimously voting to leave rates on changed at their early February meeting. This is leading to ever-changing interest rate expectations.
The Federal Reserve will need greater confidence that it Is moving inflation Sustainably toward its 2% goal before cutting rates. It currently has little pressure to do so given the relatively strong jobs environment.
That means individuals and companies that were counting on lower rates just received additional pressure. The three discussed below are just a few of many that should be sold amid shifting interest rate expectations.
Arbor Realty Trust (ABR)
Arbor Realty Trust (NYSE:ABR) Continues to head downward in 2024. Like so many other real estate firms, it has been pummeled by Fed decisions to hold rates higher for longer. The bright side for investors, if there is one, is that shares are currently below the low target price assigned by analysts. That said, it is not a contrarian pick worth making because the company has legitimate problems.
Those legitimate problems all revolve around debt of course. Arbor Realty Trust is one of the more heavily indebted REITs. REITs, by the way, are generally high debt by Nature making ABRÂ particularly troubled.Â
The company has aggressively used debt to create growth but in the process created a debt to equity ratio that is particularly weak. The company has leveraged debt over the past decade at a pace that is more than three times higher than the industry average. That was less of a problem when rates were much lower. However, today those high rates result in rising interest expenses. The company is looking worse and worse as future rate cut dates become less and less certain.
Mullen Automotive (MULN)
Financing costs are a particular problem for EV firm Mullen Automotive (NASDAQ:MULN). Recent news that rate cuts are likely to come later than expected is just one more reason for investors to jettison the stock.
The company is effectively a slow moving train wreck. it loses astounding amounts of money and those losses are mounting. The company lost more than $1 billion through the first nine months of 2023, up from a $750 million loss during the same period a year earlier. The company had only $155 million of cash and equivalents at that point so it is clearly facing some real issues.
Those issues manifest as an extraordinarily low Altman Z score. The Altman Z score is a metric used to assess the likelihood of bankruptcy in the near term. Mullen Automotive’s reading indicates that it could fold at any point.Â
Here’s the other issue: Mullen Automotive has a return on invested capital of -58%. give them $1 and they’ll turn it into $0.42.Â
Redfin (RDFN)
Redfin (NASDAQ:RDFN) has had a lot of trouble over the past few years, particularly beginning in late 2021. That’s when the first indications arose that rate hikes were ahead. Real estate stocks tend to do very poorly in high rates environments that jack mortgage rates up. Redfin was no exception.Â
The company just confirmed that pending sales reached their lowest point in the last four months. The press release delivering that news cited the Fed’s confirmation that rates are unlikely to be cut in the next two months. Thus, mortgage rates are going to remain high. In turn, fewer people are going to rush out to sign a mortgage.
Redfin has particularly egregious problems with debt. Its debt to equity ratio is worse than 99.25% of all of its peers. It’s a prime example of exactly what can go wrong when a company is overly reliant upon debt to finance its growth. It’s a simple story that has been borne out again and again over the last two years. Firms like Redfin and many others did well in the era of quantitative easing following the 2008 downturn. Now they’re facing the other side of that coin.
On the date of publication, Alex Sirois 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.
