Most consumer discretionary businesses succeed or fail based on the broader economy. Lately, it seems like demand trends have worked in their favor as the industry has returned 25% over the past six months, similar to the S&P 500.
Although these companies have produced results lately, investors must be mindful because many are fads and only a few will stand the test of time. Keeping that in mind, here are three consumer stocks that may face trouble.
La-Z-Boy (LZB)
Market Cap: $1.33 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Do We Avoid LZB?
- Annual sales declines of 2.8% for the past two years show its products and services struggled to connect with the market
- Anticipated sales growth of 1.9% for the next year implies demand will be shaky
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $32.31 per share, La-Z-Boy trades at 12.6x forward P/E. If you’re considering LZB for your portfolio, see our FREE research report to learn more.
Norwegian Cruise Line (NCLH)
Market Cap: $10.12 billion
With amenities like a full go-kart race track built into its ships, Norwegian Cruise Line (NYSE: NCLH) is a premier global cruise company.
Why Does NCLH Fall Short?
- Number of passenger cruise days has disappointed over the past two years, indicating weak demand for its offerings
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Norwegian Cruise Line’s stock price of $22.20 implies a valuation ratio of 9.5x forward P/E. To fully understand why you should be careful with NCLH, check out our full research report (it’s free for active Edge members).
WeightWatchers (WW)
Market Cap: $348.7 million
Known by many for its old cable television commercials, WeightWatchers (NASDAQ: WW) is a wellness company offering a range of products and services promoting weight loss and healthy habits.
Why Do We Pass on WW?
- Demand for its offerings was relatively low as its number of members has underwhelmed
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
WeightWatchers is trading at $34.98 per share, or 20.8x forward P/E. Read our free research report to see why you should think twice about including WW in your portfolio.
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