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 24% over the past six months, similar to the S&P 500.
Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks best left ignored.
Tapestry (TPR)
Market Cap: $23.05 billion
Originally founded as Coach, Tapestry (NYSE: TPR) is an American fashion conglomerate with a portfolio of luxury brands offering high-quality accessories and fashion products.
Why Is TPR Not Exciting?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Anticipated sales growth of 3.2% for the next year implies demand will be shaky
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Tapestry’s stock price of $110.11 implies a valuation ratio of 20.3x forward P/E. Check out our free in-depth research report to learn more about why TPR doesn’t pass our bar.
YETI (YETI)
Market Cap: $2.79 billion
Founded by two brothers from Texas, YETI (NYSE: YETI) specializes in durable outdoor goods including coolers, drinkware, and other gear tailored to adventure enthusiasts.
Why Are We Wary of YETI?
- Lackluster 6.3% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.4 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
YETI is trading at $34.89 per share, or 13.9x forward P/E. To fully understand why you should be careful with YETI, check out our full research report (it’s free for active Edge members).
Universal Technical Institute (UTI)
Market Cap: $1.79 billion
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
Why Are We Out on UTI?
- Free cash flow margin is forecasted to shrink by 2.6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Underwhelming 11.5% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $32.80 per share, Universal Technical Institute trades at 15.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including UTI in your portfolio.
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