3 Hot Stocks to Avoid as an Aggressive Fed Tries to Cool the Economy

In a search for growth, many investors have done well seeking out popular stocks. Whether it’s meme stocks discussed on forums such as Reddit’s WallStreetBets or options-driven tech stocks, there are plenty of rags-to-riches stories amid the market mania of recent years. Of course, there are also hot stocks to avoid, particularly for investors who believe another bull market may not be right around the corner.

Various macro indicators suggest we could be due for a prolonged period of pain in equity markets. Along with still-stretched valuations, many companies are seeing margin pressures as inflation rears its ugly head. Meanwhile, the Federal Reserve is seeking to cool inflation by hiking interest rates. Analysts are revising earnings estimates lower, suggesting the fundamental growth stories many investors bought into may not be so solid.

For those taking a more cautious view of the markets, here are three hot stocks to avoid.

Bed Bath & Beyond (BBBY)

Bed Bath & Beyond (NASDAQ:BBBY) has once again become a meme stock sensation. Along with other retail investor favorites that soared last month, BBBY stock has given up most of its gains in recent weeks.

News this weekend that the company’s CFO died by suicide doesn’t necessarily inspire confidence. An insider trading lawsuit alleging a “pump-and-dump” scheme by executives may have played a role in the tragic event.

Whatever the case, investors today appear much less willing to believe in the stock’s next parabolic surge. For a company that hasn’t traded on fundamentals in some time, this negative headline may be the final nail in the proverbial coffin for the troubled retailer.

The company recently said it would lay off 20% of its workforce, do away with some of its in-house home goods brands and close approximately 150 stores. To stabilize the business through the holiday season, the company is also considering raising new capital as it confronts plummeting sales. Management’s plan to sell up to 12 million shares will be dilutive for investors and is not being viewed positively on Wall Street.

Should vendors start distancing themselves from Bed Bath & Beyond, a death spiral occur in the near to medium term. Accordingly, BBBY stock is simply too risky for most investors to own right now.

DocuSign (DOCU)

A leading electronic signature and contract management company, DocuSign (NASDAQ:DOCU) has been a high-flyer in recent years. Much of this growth can be tied to the pandemic, which saw demand for e-signatures surge as work-from-home policies became the norm.

Of course, with a return to office underway, this tailwind has weakened. Like other pandemic-era darlings, investors now appear to be pricing DOCU stock on the basis of its fundamentals alone.

Now, DocuSign does have a compelling business model. Operating as a software-as-a-service (SAAS) company, DocuSign’s cash flows are attractive to many investors. Additionally, management’s goal of hitting $5 billion in annual revenue still resonates with some investors. However, roughly doubling its revenue base may be difficult in the current macro environment.

Thus, for those looking to de-risk in this time of uncertainty, DOCU is clearly one of the stocks to avoid.

U.S. Steel (X)

U.S. Steel (NYSE:X), as its name suggests, is a massive steel producer, focusing on tubular and flat-rolled steel products aimed at the North American and European markets.

In this post-pandemic era, demand for steel domestically and abroad has surged. After dipping below the $5 level during the depths of the pandemic, shares surged to a high above $39 in April of this year. That’s quite the rebound. However, like many commodities-related stocks, U.S. Steel has been hit hard by this macro environment and currently sits 44% below its 52-week high.

The potential for more interest rate hikes should, at least in theory, dampen demand for all goods. Steel is an essential component used in most infrastructure and the manufacturing of many goods such as automobiles and durable goods. Less demand in the overall economy means a deteriorating outlook for U.S. Steel. Unfortunately, it’s really that simple.

Now trading around $22 per share, perhaps X stock is a steal at these levels. Like other cyclical stocks, buying low and selling high has been a good long-term strategy. However, picking the tops and bottoms of any cycle is nearly impossible. Accordingly, those looking for more “sure” bets may want to avoid U.S. Steel.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.