Please ensure Javascript is enabled for purposes of website accessibility

5 Stocks to Sell Right Now

By Jay Jenkins - Aug 20, 2013 at 3:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It has been a tough summer for these stocks, and it's only going to get worse.

Over the summer, rising interest rates have been one of the most influential trends in the markets. In my view, that trend will continue, and as such, I have identified five stocks to avoid as the trend plays out.

Just take a look at this graph of mortgage interest rates year to date. The leap in rates from May to August is just staggering.

US 30 Year Mortgage Rate Chart

US 30 Year Mortgage Rate data by YCharts.

Why are rates rising?
Rates are rising, simply put, because the market is anticipating an end to the quantitative easing, bond buying, and other monetary stimulus policies currently deployed by the Federal Reserve. The sudden spike we see beginning in late May is a result of statements made by Fed Chairman Ben Bernanke, widely interpreted to mean that the Fed would be ending its programs sooner rather than later.

The mortgage industry sees the most obvious impact from rising rates. You can read more about that here. Put simply, banks sell products whose price depends on interest rates. Higher rates equal higher prices. Higher prices means fewer individuals or business will be willing to buy.

Head for the hills
But if you take a step back, the fate of interest rates also has a big impact on another industry: homebuilders.

The relationship can be seen in the chart below, which compares the percentage change in mortgage rates year to date with the stock price performance of five homebuilders. You can see that in May, right at the moment 30-year interest rates begin to skyrocket, these stocks began a nose dive, moving down essentially in unison between 17% and 26%.

KBH Chart

KBH data by YCharts.

The reason is simple enough: The cost to purchase a home for most Americans is more than just the list price. It also includes the interest rate on the mortgage used to buy the house.

Back in May, the market rate for 30-year fixed mortgages was approximately 3.35%. The payment for a potential buyer, assuming a 30-year loan, comes to $441. That same loan at today's rates -- about 4.4% -- would be $605. That is a 37% increase in monthly payment.

If rates continue to rise over the next 6 to 18 months, which most analysts think will happen, the impact on the affordability of housing will become even more significant.

Assume that same loan eventually comes with a 5.5% interest rate. That monthly payment would be $672. That's a 52% increase in the monthly payment, driven only by changing interest rates. And 5.5% is still low by historical standards.

The takeaway
For consumers, this rise in the cost of a mortgage could deter many potential buyers. For many, it will make buying a new home too expensive and lead them to purchase an existing, less expensive home. The result is fewer buyers in the market for a new home.

For national homebuilders like KB Home (KBH 1.55%), DR Horton (DHI 1.30%), Lennar Corp. (LEN 0.58%), Pulte Group (PHM 1.54%), and MDC Holdings (MDC 1.96%), who produce new homes, rising rates is bad news for business.

Some value investors may claim that now is the time to buy, as the market has factored in the impact of rising rates already this summer. I disagree.

To me, these are five stocks to avoid. I think rates will continue to rise, and the full impact of this change has not yet worked its way into these stock's prices. There's still room for the stocks to sink, and I think the pain for shareholders will continue. 

Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
$79.72 (1.30%) $1.02
Lennar Corporation Stock Quote
Lennar Corporation
$88.27 (0.58%) $0.51
PulteGroup, Inc. Stock Quote
PulteGroup, Inc.
$44.95 (1.54%) $0.68
KB Home Stock Quote
KB Home
$33.46 (1.55%) $0.51
M.D.C. Holdings, Inc. Stock Quote
M.D.C. Holdings, Inc.
$35.98 (1.96%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.