Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 11.5%. This performance was worse than the S&P 500’s 2.5% fall.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks we’re steering clear of.
Inspired (INSE)
Market Cap: $213.1 million
Specializing in digital casino gaming, Inspired (NASDAQ: INSE) is a provider of gaming hardware, virtual sports platforms, and server-based gaming systems.
Why Do We Think Twice About INSE?
- Lackluster 1.9% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Estimated sales growth of 2.3% for the next 12 months is soft and implies weaker demand
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.5% for the last two years
Inspired’s stock price of $7.92 implies a valuation ratio of 2.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than INSE.
Rush Street Interactive (RSI)
Market Cap: $1.19 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.
Why Does RSI Fall Short?
- Estimated sales growth of 12.4% for the next 12 months implies demand will slow from its two-year trend
- Operating margin of 0.5% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Poor free cash flow margin of 8.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $12.96 per share, Rush Street Interactive trades at 38.2x forward P/E. Read our free research report to see why you should think twice about including RSI in your portfolio.
Playa Hotels & Resorts (PLYA)
Market Cap: $1.73 billion
Sporting a roster of beachfront properties, Playa Hotels & Resorts (NASDAQ: PLYA) is an owner, operator, and developer of all-inclusive resorts in prime vacation destinations.
Why Is PLYA Not Exciting?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Sales are projected to be flat over the next 12 months and imply weak demand
- Low returns on capital reflect management’s struggle to allocate funds effectively
Playa Hotels & Resorts is trading at $13.45 per share, or 21.7x forward P/E. Check out our free in-depth research report to learn more about why PLYA doesn’t pass our bar.
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