The performance of consumer discretionary businesses is closely linked to economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 32.3% over the past six months, outpacing S&P 500 by 4.3 percentage points.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here is one resilient consumer stock at the top of our wish list and two we’re passing on.
Two Consumer Discretionary Stocks to Sell:
WideOpenWest (WOW)
Market Cap: $438.8 million
Initially started in Denver as a cable television provider, WideOpenWest (NYSE: WOW) provides high-speed internet, cable, and telephone services to the Midwest and Southeast regions of the U.S.
Why Do We Think WOW Will Underperform?
- Sluggish trends in its subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Cash-burning history makes us doubt the long-term viability of its business model
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
WideOpenWest’s stock price of $5.12 implies a valuation ratio of 3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including WOW in your portfolio.
Acushnet (GOLF)
Market Cap: $4.73 billion
Producer of the acclaimed Titleist Pro V1 golf ball, Acushnet (NYSE: GOLF) is a design and manufacturing company specializing in performance-driven golf products.
Why Do We Pass on GOLF?
- Sales trends were unexciting over the last two years as its 2.2% annual growth was below the typical consumer discretionary company
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.1%
- Waning returns on capital imply its previous profit engines are losing steam
Acushnet is trading at $80.68 per share, or 23.2x forward P/E. To fully understand why you should be careful with GOLF, check out our full research report (it’s free for active Edge members).
One Consumer Discretionary Stock to Watch:
Target Hospitality (TH)
Market Cap: $759.3 million
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.
Why Are We Fans of TH?
- Healthy operating margin of 25.9% shows it’s a well-run company with efficient processes
- Strong free cash flow margin of 23% enables it to reinvest or return capital consistently
- Returns on capital are growing as management capitalizes on its market opportunities
At $7.55 per share, Target Hospitality trades at 23.1x forward EV-to-EBITDA. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
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