Good stocks are better buys when they've been beaten down, but not all beaten-down stocks are good buys.
That's the conundrum investors are facing with several constituents of the S&P 500 index right now. Whereas the index itself gained another 2.2% in June, some of the index's stocks fell by double digits. Are these steep sell-offs buying opportunities or a glimpse of what's to come?
It's likely the latter. At the very least, however, these losses are reasons to steer clear and shop for other opportunities. There's nuance in the pullback for these five stocks that suggests this is more than typical volatility.
Birds of a feather
There's no need to dance around the issue. Freeport-McMoRan (FCX -1.78%) and Newmont Corporation (NEM -0.72%) were among the S&P 500's biggest losers last month, falling 13.1% and 13.7%, respectively. You'll also find American Airlines Group (AAL 0.41%), Alaska Air Group (ALK 3.73%), and Southwest Airlines (LUV -0.21%) among that group with respective losses of 12.5%, 12.8%, and 13.6%.
The common threads are clear. Freeport-McMoRan and Newmont are mining outfits, while the other three are airlines. This is not an insignificant detail.
In his book How to Make Money in Stocks, William J. O'Neil -- also the founder of Investors Business Daily -- lays out years' worth of findings about what makes the stock market tick. One of the most important of these findings was that 37% of any given stock's movement can be attributed to the influence exerted on it by its industry peers, while another 12% of a stock's performance can be chalked up to its broad sector's influence. In other words, picking the right group is half the battle!
We're certainly seeing this idea play out with mineral mining and airline stocks right now. Airlines as a group fell nearly 12% in June, with much of that setback spurred by warnings from American Airlines and Delta Air Lines that the all-important business travel category isn't recovering as quickly as leisure travel is. Indeed, Delta estimates that revenue for its recently ended second quarter will still be about half of what it was in the comparable quarter of a pre-COVID 2019.
Meanwhile, mineral mining stocks tumbled 10% last month, mostly in response to China's new efforts to cool overheating metals prices. It appears to have worked. Gold prices suffered the biggest daily loss in months back on June 17 with selling boosted by comments from the Federal Reserve suggesting it's finally looking to curb inflation with higher interest rates. UBS downgraded Rio Tinto later in the month on concerns that iron ore prices would remain suppressed for the foreseeable future.
Although it's not always the case, in this instance, investors are taking all of these red flags to heart in a big way. That's telling in and of itself.
Take the hint
Just because whole peer groups are falling, that doesn't inherently mean these pullbacks can't suddenly reverse course -- anything's possible. This sweeping, industrywide weakness suggests, however, that investors are seeing bigger and more structural problems for the mining and airline industries. Such assessments don't materialize from nothing, and these companies seem to be facing headwinds that are not the sort that can be quickly overcome.
Even if the sell-offs from airline and mining stocks cool off from here, there's still too much uncertainty to deem them buys.