The performance of consumer discretionary businesses is closely linked to economic cycles. 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 31.1% and beat the S&P 500 by 6.4 percentage points.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re passing on.
PVH (PVH)
Market Cap: $4.07 billion
Founded in 1881 by a husband and wife duo, PVH (NYSE: PVH) is a global fashion conglomerate with iconic brands like Calvin Klein and Tommy Hilfiger.
Why Do We Steer Clear of PVH?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Estimated sales growth of 2.5% for the next 12 months is soft and implies weaker demand
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
PVH’s stock price of $84.59 implies a valuation ratio of 7.4x forward P/E. Dive into our free research report to see why there are better opportunities than PVH.
Golden Entertainment (GDEN)
Market Cap: $589.6 million
Founded in 2001, Golden Entertainment (NASDAQ: GDEN) is a gaming company operating casinos, taverns, and distributed gaming platforms.
Why Does GDEN Worry Us?
- Sales tumbled by 3.3% annually over the last five years, showing consumer trends are working against its favor
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Poor free cash flow margin of 3.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Golden Entertainment is trading at $22.54 per share, or 30.7x forward P/E. Read our free research report to see why you should think twice about including GDEN in your portfolio.
Sabre (SABR)
Market Cap: $860 million
Originally a division of American Airlines, Sabre (NASDAQ: SABR) is a technology provider for the global travel and tourism industry.
Why Do We Think Twice About SABR?
- Sluggish trends in its central reservation system transactions 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
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $2.18 per share, Sabre trades at 8.7x forward P/E. Check out our free in-depth research report to learn more about why SABR doesn’t pass our bar.
Stocks We Like More
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