June was another wild month in the stock market, with some stocks posting big gains while others suffered steep losses. There are a few major themes that are influencing stocks right now, and it's important for investors to understand them as we prepare for the second half of the year. These industries and individual stocks illustrate the important forces that moved the market last month.
1. Travel stocks
June was a rough month for transportation stocks, particularly airlines and cruise operators. Carnival (CCL -1.14%) was down 37%, Royal Caribbean (RCL -0.45%) dropped 39%, and Norwegian Cruise Lines (NCLH 0.75%) fell 30%. Delta Air Lines (DAL -0.21%), Southwest (LUV 0.75%), American (AAL 0.70%), and United (UAL 1.12%) all dropped 20%-30%, too.
Data by YCharts
Less than two years removed from the unprecedented pandemic travel shutdown, these companies are all dealing with a new perfect storm of threats. Abnormally high fuel and labor costs impact airline and cruise line profit margins. Simultaneously, consumers are getting crushed by high inflation and recession fears related to the Fed's rate hikes.
Many of these companies are ill-equipped to withstand sudden shocks to their cash flows. They have enormous fixed costs, carry a lot of debt, and have to invest heavily in the purchase and upkeep of machinery. That translates to cash flowing to lenders, employees, and suppliers each quarter, rather than to shareholders. This is only going to get more difficult as the cost of capital rises with interest rates.
Image source: Getty Images.
This has Wall Street on edge. These stocks are all fairly cheap compared to their historically normal levels of cash flow, so it could be a bargain based on short-term fears. Still, these are all legitimate threats and there aren't any clear growth catalysts on the immediate horizon. It could get worse before it gets better.
2. Freeport-McMoRan
Freeport-McMoRan (FCX -1.22%) is one of the world's leading producers of copper, and it's also a significant player in the gold mining market. The stock fell 26% in June as commodity prices fell steeply.
Like the transportation stocks, many mining stocks are getting hit by a combination of recession fears, high fixed costs, and debt-heavy balance sheets. Spot prices for copper and other metals are forcing investors to revise their profit forecasts downward for Freeport-McMoRan and other mining companies.
3. Marathon Oil
Marathon Oil (MRO -1.46%) is an oil production and exploration company that fell nearly 28% in June. The energy sector dealt with some of the same issues as mining stocks. Crude oil spot prices tumbled around 17% in the month, and the SPDR Energy Sector ETF was dragged down 19% as a result. Marathon Oil fits the debt-heavy, capital intensive description of other stocks on this list. As crude oil gave back some of its gains from earlier in the year, companies like Marathon are threatened by lower cash flows.
Marathon Oil has the extra drawback of a 1.5% dividend yield, which is lower than many of its peers. That likely takes away momentum from the stock, because there are other options around with similar catalysts and higher dividend returns.
4. Chewy
Chewy (CHWY -0.06%) rose nearly 50% in June. The company started the month with a great earnings report that exceeded estimates. Chewy was among the high-growth pandemic stocks that crashed over the past year after reaching unsustainably high valuation levels. At a more reasonable 1.7 price-to-sales ratio, investors now have a chance to give this e-commerce stock a fair shake.
Many pets were adopted during the pandemic, which should lead to sustainable demand for pet products. Chewy is thriving in that environment, and its sales continue to grow profitably. Even more encouraging, Chewy customers are actually spending more over time. That's a bullish signal for a company that faces stiff competition and high expectations.
5. Veeva Systems
Veeva Systems (VEEV -0.62%) rose 15% in June after it beat Wall Street estimates for quarterly sales and raised full-year forecasts. Veeva dominates the cloud software market for the life sciences industry. Its software supports pharmaceutical and biotech companies in a range of applications such as drug development, regulatory compliances, clinical trial management, marketing, and sales. That creates a tremendous amount of opportunity, but investors still need to maintain reasonable expectations.
Veeva Systems is following a path that's common among many high-growth tech stocks right now. It shot to historically high valuation levels in 2020, and it's endured a volatile period over the past 6-12 months as investor risk appetite normalizes. Growth stocks experienced some relief in June after they took such a beating in the prior months. Veeva itself is dealing with slower sales and some operating margin compression, which is a bad mixture for any growth stock. However, it's got a wide economic moat and looks ready to continue outpacing wider economic growth for the foreseeable future. Investors just need to keep expectations realistic.
