Analysts at Morgan Stanley, Charles Schwab and Reuters recommend investors trim their holdings in Wayfair, Royal Caribbean and Carnival as US borrowing costs rise.

The US Federal Reserve begins to scale back its bond purchases today, adding to upward pressure on corporate borrowing costs. This practice, known in financial markets as tapering or quantitative tightening (QT), underscores the need for investors to regularly monitor their portfolios.

The right move here might be to reduce exposure to heavily indebted companies that are likely to see higher interest charges.

We ran Etrade’s stock analyzer to find the companies that Morgan Stanley recommends investors reduce their holdings. Another criterion of our research was a negative rating from Thomson Reuters and the highest leverage ratio among companies with a market capital of at least US$2 billion. These three actions are:

Wayfair had the worst revenue drop in the industry

Wayfair Inc. (W) operates an e-commerce platform that offers products for your home ranging from furniture to plates. According to Refinitiv, the online retailer’s debt-to-equity ratio is the highest in the department store industry. Its revenue fell more than 13% from a year earlier, the worst performance among its peers.

Even if sales return to growth after an expected decline, “profitability is uncertain,” according to a Morgan Stanley report in early May after the company reported results.

“Active customers are declining sequentially and the number of orders continues to slow,” Morgan Stanley analysts said. “This would suggest that the platform is not building truly loyal customers and may need to ramp up advertising or lower prices – and forfeit margin anyway – to continue taking market share.”

Even Market Edge recommends investors avoid Wayfair while Charles Schwab says customers should sell. Those who hold the stock may pay the price, with a negative return on assets of 10.4%, while return on equity languishes at zero.

Royal Caribbean’s aggressive use of debt to fund growth

Royal Caribbean (RCL) has been burning cash since the pandemic when cruise line operations were suspended. As cruises have resumed and the company expects to reach full capacity by summer, gross margin has lagged the industry average in each of the past five years, according to Refinitiv. .

The company had a debt-to-equity ratio of 5.64 times in its most recent quarter, indicating that “it has been more aggressive in using debt to finance growth than 94% of its peers in the ‘hotel, motel and cruise line industry,'” according to data from the ETrade website.

Refinitiv has a fundamental rating of 1 for Royal Caribbean, which is significantly more bearish than the hotel and cruise line industry average of 4.3.

“We are cautious on the cruise industry in general and are underweight RCL stocks as we believe the industry’s return to normal will take longer than expected, strong growth in the supply can mitigate pricing power, leverage is high,” Morgan Stanley analysts wrote in a note in early May.

To see the stock’s performance, check out our dedicated guide here.

Carnival’s high refinancing cost

Carnival Corp. (CCL), which operates cruise lines including its eponymous brand, Princess Cruises and Cunard, has seen its outlook darken over the past three months. Analysts cut their price target on the stock by 19% over that period, according to Refinitiv. Its financial results have disappointed the US market in each of the past four quarters, with the latest numbers missing estimates by 21%.

The company has a debt-to-equity ratio of over 70%. On May 26, it closed a private offering of US$1 billion in notes due 2030 that will pay a coupon rate of 10.5%. The funds will be used primarily to refinance debt maturing next year.

“The expensive coupon suggests there is now little to no upside refinancing left in the company as it was paying 10% to 11% for post-Covid debt increases,” Morgan Stanley analysts said in a note. of May 18.

Even the technical charts are going against Carnival, with moving averages suggesting investors are selling the stock, according to TradingView. MarketEdge said clients should bet against the stock, while those holding bullish bets should either close their position or watch it closely to watch for potential losses.

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