A couple of concerns should be making investors cautious about certain stocks in the market. Consumer spending could be seriously impacted in the first quarter due to a number of new issues. Gas prices have been spiking in recent weeks, a payroll tax hike of roughly 2% was implemented starting on January 1, and income tax refunds have been delayed because the "fiscal cliff" debate caused the Internal Revenue Service to not accept returns until January 30. Plus, even as tax refunds are issued, the amounts are likely to be less than last year thanks to tax increases on a number of Americans. All these factors may soon combine and become a perfect storm that creates a challenge for the economy and consumer spending which has historically been a key driver of profits for many companies.
While these issues are so new that it is hard to know the full extent or impact of these changes and concerns, there are recent signs that consumer spending is coming under significant pressure. An email that was recently leaked from Wal-Mart (WMT) states: "In case you haven't seen a sales report these days, February (month-to-date) sales are a total disaster." This email was from Jerry Murray, Wal-Mart's vice president of finance and logistics and sent to other executives. He went on to say that it was the worst start to a month he has seen in about 7 years. He went on to blame the payroll tax increase for the weak sales, and that could also be a concern for many companies beyond just Wal-Mart.
While some investors might be hoping that payroll tax increases, higher gas prices and delayed and lower tax refunds won't amount to a major headwind for certain stocks, or even the entire market in the coming weeks, this seems to be a concern that investors should take seriously, especially when one of the world's largest retailers is seeing significant weakness in consumer spending. If other companies come out in the near-term with similar warnings of weak sales in the first quarter, we could see a much overdue market drop, or at least a correction in many stocks that are heavily tied to consumer spending.
In the past couple of years, investors who have sold into strong rallies and bought when markets went through weak periods did very well. With this in mind, it might make sense to prepare your portfolio for the next buying opportunity in the market and in select stocks. Here are a couple of companies that might soon be experiencing weaker than expected sales just as Wal-Mart appears to be seeing now. These stocks might decline in the coming weeks and become better values for investors to consider:
Ford Motor Company (F) shares have rallied sharply in recent months, rising from about $10 in November to around $13 this week. However, all of that roughly 30% gain might not last for long. Auto sales are highly dependent on consumer spending and confidence and with signs that both of those factors could be taking a hit, it might not be long before sales suffer. If consumers are cutting back on low-ticket items that Wal-Mart sells, it seems reasonable to believe that major purchases like a new car might be put on hold, especially if tax refunds that are often used as downpayment money are being delayed.
Furthermore, upcoming budget cuts such as the sequester planned on March 1 could lead to job cuts and job security concerns that might cause some consumers to keep their current vehicles rather than buy a new one. If Ford shares drop back to lower levels, that might be the time to consider the shares again as it has an excellent management team led by CEO Alan Mulally. He has helped Ford improve its balance sheet and introduce popular new designs that feature fuel efficiency. This makes the stock worth considering on major pullbacks.
MGM Resorts International (MGM) shares have surged from the November lows of about $9 to around $13 recently. That could put the stock at risk of some profit-taking in the near-term, especially if revenues or guidance comes in weaker than expected in the coming months. MGM is a major hotel and casino company that focuses on the Las Vegas market with properties such as the Bellagio, The Mirage, Monte Carlo, New York-New York, Mandalay Bay and Aria, just to name a few.
This emphasis on Las Vegas makes the company dependent on the health of U.S. consumer spending and if consumers are cutting back on Wal-Mart purchases, they might be also less inclined to spend on a weekend trip to Vegas. Consumers who still go on vacations might be likely to spend less on food, drinks and gambling once they are there and this could also put pressure on revenues and profit margins for MGM. MGM has a major debt load with about $13.83 billion in debt and around $2.56 billion in cash. Any drop in revenues could slow progress on managing the debt and reduce investor interest in the shares, especially with the gains it has seen in recent months. In a pullback, MGM shares might find support around the 200-day moving average which is right around $11, and that might be a better time to consider the stock.
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.