18 Stocks to Avoid if the U.S. Falls Into a Recession, Including Apple

With much of the world experiencing slower economic growth and global financial markets tumbling, the odds of a recession happening in the U.S. have been starting to increase. 

A recent survey of economists by The Wall Street Journal found that the likelihood of a recession in the next 12 months had increased to 21%, double the level of a year ago. Despite the rising concern, Federal Reserve Chair Janet Yellen says a U.S. recession is still unlikely, as do many executives and analysts.

While economists at New York investment bank Morgan Stanley are still predicting growth this year -- albeit only slight -- the bank's models indicate the risk of a recession is rising. Morgan Stanley surveyed its U.S. analysts to pick the 18 worst stocks to own if the U.S. economy does enter another slowdown (yesterday we published a list of their best stocks to own if the U.S. falls into recession).

Here's what they think: 

American Airlines

Analyst Rajeev Lalwani believes American's AAL  below average margins and limited profit sharing "defines the fixed-cost skewed structure," which he feels is less desirable in a downturn.

"Despite a growing focus on maximizing revenues of late, we believe: 1) Elevated leverage through 2016 may magnify weak trends; 2) The large aircraft order book driving $5-6B in annual capex hinders cash flow generation; and 3) Exposure to premium traffic means pricing will take an outsized hit relative to the group overall," he writes.

Apple

"Apple AAPL sells mid- to high-end computing devices, mainly smartphones, tablets and PCs," analyst Kathy Huberty writes. "In a recession, consumers will delay purchases or delay adopting another computing device, in effect reducing Apple's addressable market and revenues."

Huberty sees the company's huge investments in data centers, stores, production equipment and research and design as potential drags on earnings per share if a recession were to hit.

Ashford Hospitality Trust

For analyst Thomas Allen, the biggest drawback to owning Ashford Hospitality Trust AHT  is simple -- too many loans.

"AHT has $3.3B of debt maturities coming due in 2016-2018, on a cash base of <$300m," Allen writes. "While most of the loans have several extension options, it is something to be wary of if the capital markets freeze up."

Autodesk

Two things should prevent investors from buying up shares of Autodesk ADSK during a recession, according to analyst Keith Weiss.

The first is that the software group has very high exposure to international markets, with more than 70% of its revenue coming from overseas.

The second reason is Autodesk is currently going through a model transition. "Timing could hardly be worse for a cyclical downturn at Autodesk, as the company is set to be at the nadir of their revenue-generating capabilities due to a transition to a subscription model in the upcoming year," Weiss writes.

Bloomin' Brands

"While we recommend caution for the overall group, based on the fundamental performance during the last recession, Bloomin' BLMN is perhaps the most vulnerable," analyst John Glass writes.

Glass cites the casual dining industry's 6% decline in traffic during the previous recession in addition to secular headwinds, such as an industry slump and rising labor costs, as reasons to avoid owning Bloomin' Brands.

Coach

Investing is Coach COH  means big risk, according to analyst Kimberly Greenberger. "In the event of a recession, COH's top-line turnaround story likely becomes unhinged, driving a return to significantly negative comps, promotionally driven gross margin erosion, and sales driven SG&A deleverage," she writes.

Community Health Systems


Analyst Andrew Schenker believes Community Health Systems' CYH strong foothold in rural areas would hurt the company in a potential slowdown, making it a bad buy.

"Healthcare facilities utilization has demonstrated a clear correlation to unemployment and in the economy in past cycles as employees and beneficiaries shoulder a greater portion of the healthcare burden," Schenker writes. "While the group is likely less cyclical as a result of the [Affordable Care Act] than in the past, we would expect a recession would negatively impact utilization levels with rural markets likely underperforming urban markets as in the last cycle."

Ford Motor

Ford Motor F is too dependent on the U.S. markets, according to analyst Adam Jonas. Jonas said this dependency could expose the company to risk if a recession hits the U.S.

"Like other domestic peers, Ford's double digit NA margins are driven in part by all-time record high used prices, all-time high loan terms, all-time high leasing penetration, record low interest rates and a healthy ABS market -- all of which could be exposed to a cyclical downturn," he writes.

GoPro

Analyst James Faucette sees GoPro's GPRO high channel inventory as potential problem during a recessionary period, writing "a recession would incrementally hinder the channel's ability to work down inventory to adequate levels."

He also thinks a recession would hinder retailers from committing upfront to "action cameras" as the company launches new products.

Hill-Rom Holdings

Over the past two years, hospitals have spent plenty on new equipment, giving equipment retailer Hill-Rom HRC plenty of room to grow. But if a recession were to hit, sales could slump, according to analyst David Lewis.

"In a recession we could see a slowdown of capital expenditures by hospitals, especially in non-revenue generating capital such as hospital beds, which would likely pressure growth and margins, leading to multiple compression," Lewis writes.

Navistar International

Despite potential industry-wide problems in the trucking business, Navistar International NAV has the greatest risk for potential downside, according to analyst Nicole DeBlase.

"As the average age of a Class 8 truck is now below the 20-year average of 6 years, we expect replacement demand to step down considerably, and we believe this is causing the ongoing downshift in fleet spend on trucks," she writes.


Outfront Media

Outfront Media's OUT large US advertising exposure is just one risk that the company might face if a recession were to hit the U.S., according to analyst Benjamin Swinburne.

Another risk is one Swinburne foresees impacting the company much more in the short term. "Outfront continues to be pressured by the uncertainty surrounding renewal of its NY MTA contract (~15% of revenues), for which an RFP is expected soon," he writes. "This could also potentially jeopardize the company's 5% dividend growth in the short term."

Rockwell Automation

Analyst Nigel Coe believes Rockwell Automation ROK is already working against a weak industrial demand environment, and a recession would make those problems more difficult to fight off.

"ROK is the most macro sensitive stock under our EE/MI coverage, with above average exposure to capital intensive and 'heavy' industries, where EPS cuts tend to be magnified under weak macro conditions," Coe writes.

Santander Consumer USA

"[Santander Consumer SC ] is the largest subprime auto finance company," analyst Cheryl Pate writes. "In a recession environment we would expect a steep rise in credit costs (from ~7% net loss rate today up towards the range of prior cycle peak of 12+%) to negatively impact the earnings outlook."

Pate adds the company dependency on capital markets to fund loans could prove risky during an economic downturn.

Sprint

Analyst Simon Flannery believes Sprint S already faces "significant financial, competitive and technological challenges which may be exacerbated in a recession."

Sprint must invest more heavily in its network to reach a more competitive level if it wants to remain viable during a recessionary period, according to Flannery.

Time Inc.

Analyst Toni Kaplan sees a revenue struggle ahead of Time Inc. TIME if a recession were to hit because magazines are a cyclical product.

"Lower circulation would drive lower advertising revenue, as advertisers reduce the number of ad pages they purchase, and pricing of those pages could be impacted," Kaplan writes.

US Steel Corp.

US Steel Corp. X is already facing strong headwinds from a competition standpoint alone, and its dependency on a strong automotive market would hurt the company during a recessionary period, according to analyst Evan Kurtz.

"If automotive production were to slip in the US on the back of a recession, the cash flow and liquidity outlook for X would deteriorate further, and we would expect shares to trade purely on option value," he writes.

Whiting Petroleum


Seventy-nine percent of Whiting Petroleum's WLL product mix is oil, meaning the company is significantly exposed to oil prices. Analyst Drew Venker sees this as a downside for the company if a downturn does hit the U.S.

"In a downturn we would expect Whiting's sales volume decline to accelerate and leverage to increase at a more rapid pace," Venker writes. "The stock could trade closer to our bear case reflecting a long-term WTI oil price of $47, which equates to over 90% downside."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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