Most consumer discretionary businesses succeed or fail based on the broader economy. This volatility leads to big swings in stock prices that have worked in their favor recently - over the past six months, the industry has returned 32.3% and beat the S&P 500 by 4.3 percentage points.
Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. On that note, here is one consumer stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Consumer Discretionary Stocks to Sell:
Genesco (GCO)
Market Cap: $302.6 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Should You Sell GCO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Genesco’s stock price of $28.03 implies a valuation ratio of 15x forward P/E. Check out our free in-depth research report to learn more about why GCO doesn’t pass our bar.
Cable One (CABO)
Market Cap: $912.4 million
Founded in 1986, Cable One (NYSE: CABO) provides high-speed internet, cable television, and telephone services, primarily in smaller markets across the United States.
Why Are We Out on CABO?
- Number of residential data subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Projected sales decline of 3.2% over the next 12 months indicates demand will continue deteriorating
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Cable One is trading at $158.90 per share, or 4.4x forward P/E. To fully understand why you should be careful with CABO, check out our full research report (it’s free for active Edge members).
One Consumer Discretionary Stock to Watch:
United Parks & Resorts (PRKS)
Market Cap: $2.90 billion
Parent company of SeaWorld and home of the world-famous Shamu, United Parks & Resorts (NYSE: PRKS) is a theme park chain featuring marine life, live entertainment, roller coasters, and waterparks.
Why Could PRKS Be a Winner?
- Excellent operating margin of 26.5% highlights the efficiency of its business model
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 23.8% exceeded its revenue gains over the last five years
- Returns on capital are climbing as management makes more lucrative bets
At $52.79 per share, United Parks & Resorts trades at 10.9x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.
High-Quality Stocks for All Market Conditions
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