A recessionary period seems inevitable as the economy struggles to recover from the ongoing damage caused by COVID-19. Certain industries will take longer to recover than others, with some likely changed forever.
When Tesla (NASDAQ: TSLA) CEO Elon Musk tweeted that his own company was overvalued on May 1, you knew something was amiss. Despite the tweet wiping $14 billion off of the company’s value, Tesla stock has still soared close to 300% year-on-year in what appears to be more down to hype than substance.
Admittedly, there is a lot of potential in the electric car sector as analysts estimate that 58% of new car sales by 2040 will be electric. Tesla’s market value is now double that of traditionally leading car manufacturers Fiat Chrysler (BIT: FCA), Ford (NYSE: F) and General Motors (NYSE: GM) combined. It appears that investors have a distorted view of Tesla’s true value, however.
In recent years, Tesla has failed to deliver on a lot of its promises, and with a recession looming, it looks like matters will not improve in this regard. Car sales during the pandemic are significantly depressed, and during a recession, car sales generally fall significantly, with estimates of a 22% drop in global car sales in 2020.
People have lower disposable income to spend as a result of job cuts and losses. While Tesla looks set to have a great hold on the electric car market (14% of global EV sales in 2019), its current price appears to be fueled by bubble chasers rather than value chasers.
Investors should be wary of Tiffany’s (NYSE: TIF) stock going forward, especially with growing concerns that Louis Vuitton‘s (EPA: MC) takeover bid might fall through. This is entirely possible, as just last month, Sycamore Partners expressed its desire to pull out of its acquisition of L Brands-owned (NYSE: LB) Victoria’s Secret, citing pandemic-driven closures as its reason.
Tiffany’s is in the same non-essential, discretionary items segment of retail and its stores have also suffered from prolonged closure. The deal with Louis Vuitton is worth about $16 billion, with the all-cash price of $135 per share being announced in November 2019.
If this deal goes ahead, it will be good for current Tiffany’s investors who will be getting a premium on their shares. If the deal ends up falling through, Tiffany’s share price could very well tank below $100, where it was before the Louis Vuitton deal was announced.
This deal is the only reason Tiffany’s price has not fallen further during this uncertain period. Whatever the case may be, the future outlook of consumer spending on luxury products will likely be dampened for the coming years. With little upside potential and a lot of downside risk, Tiffany’s is a stock to be avoided.
Having fallen sharply at the start of the outbreak, Starbucks (NASDAQ: SBUX) stock has recovered more than 20% since April. However, its future could be rocky as we face down the possibility of recession. It is highly likely that the high price point for Starbucks coffee will lead to a decrease in sales as people look to curb discretionary expenditure.
The credit rating agency Fitch has downgraded Starbucks debt to BBB and has a negative outlook for the firm. This is due to the ongoing business interruption and the fall in discretionary spending. With social distancing requirements coming into place, Starbucks shops will likely be limited as a gathering spot for a while to come.
The transition to working from home could become a much more permanent arrangement for a lot of professionals, meaning less customers for business-centric city chains. Therefore, with all of this uncertainty, it is a good time to be wary about Starbucks investments.
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Contributing Writer at MyWallSt
Andrew is a contributing writer to MyWallSt. He is a full-time finance writer, having spent time working in the industry. He studied Economics and Finance and has been fascinated with the financial markets since his teens. The first stock that Andrew bought was Apple, reflecting his love for its products.