The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 2%. This drawdown was discouraging since the S&P 500 returned 5%.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks we’re passing on.
Golden Entertainment (GDEN)
Market Cap: $646.9 million
Founded in 2001, Golden Entertainment (NASDAQ: GDEN) is a gaming company operating casinos, taverns, and distributed gaming platforms.
Why Do We Think Twice About GDEN?
- Sales tumbled by 3.3% annually over the last five years, showing consumer trends are working against its favor
- Anticipated sales growth of 1.1% for the next year implies demand will be shaky
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.3% for the last two years
Golden Entertainment’s stock price of $24.74 implies a valuation ratio of 31.9x forward P/E. Check out our free in-depth research report to learn more about why GDEN doesn’t pass our bar.
Mattel (MAT)
Market Cap: $5.78 billion
Known for the creation of iconic toys such as Barbie and Hotwheels, Mattel (NASDAQ: MAT) is a global children's entertainment company specializing in the design and production of consumer products.
Why Are We Hesitant About MAT?
- Annual revenue growth of 2.7% over the last two years was below our standards for the consumer discretionary sector
- Anticipated sales growth of 2.5% for the next year implies demand will be shaky
- Diminishing returns on capital suggest its earlier profit pools are drying up
Mattel is trading at $17.86 per share, or 11x forward P/E. Dive into our free research report to see why there are better opportunities than MAT.
H&R Block (HRB)
Market Cap: $6.75 billion
Founded in 1955 by brothers Henry W. Bloch and Richard A. Bloch, H&R Block (NYSE: HRB) is a tax preparation company offering professional tax assistance and financial solutions to individuals and small businesses.
Why Is HRB Not Exciting?
- Annual revenue growth of 4.1% over the last two years was below our standards for the consumer discretionary sector
- Estimated sales growth of 3.3% for the next 12 months is soft and implies weaker demand
- Waning returns on capital imply its previous profit engines are losing steam
At $50.42 per share, H&R Block trades at 1.8x forward price-to-sales. Read our free research report to see why you should think twice about including HRB in your portfolio.
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