Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 1.8% return has lagged the S&P 500 by 5.9 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks we’re passing on.
Bright Horizons (BFAM)
Market Cap: $6.67 billion
Founded in 1986, Bright Horizons (NYSE: BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Should You Sell BFAM?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Incremental sales over the last five years were less profitable as its 1.8% annual earnings per share growth lagged its revenue gains
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $116.58 per share, Bright Horizons trades at 28x forward P/E. To fully understand why you should be careful with BFAM, check out our full research report (it’s free).
Latham (SWIM)
Market Cap: $807.6 million
Started as a family business, Latham (NASDAQ: SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.
Why Does SWIM Give Us Pause?
- Products and services aren't resonating with the market as its revenue declined by 10.9% annually over the last two years
- Operating margin of 3.4% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Negative returns on capital show management lost money while trying to expand the business
Latham is trading at $7.04 per share, or 50x forward P/E. If you’re considering SWIM for your portfolio, see our FREE research report to learn more.
European Wax Center (EWCZ)
Market Cap: $239 million
Founded by two siblings, European Wax Center (NASDAQ: EWCZ) is a beauty and waxing salon chain specializing in professional wax services and skincare products.
Why Are We Hesitant About EWCZ?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Forecasted revenue decline of 1.4% for the upcoming 12 months implies demand will fall off a cliff
- Flat earnings per share over the last three years lagged its peers
European Wax Center’s stock price of $5.75 implies a valuation ratio of 17.9x forward P/E. Read our free research report to see why you should think twice about including EWCZ in your portfolio.
High-Quality Stocks for All Market Conditions
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
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