Consumer discretionary businesses are levered to the highs and lows of economic cycles. Thankfully for the industry, all signs are pointing up as discretionary stocks have gained 41.3% over the past six months, beating the S&P 500’s 34.7% return.
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. With that said, here are three consumer stocks we’re steering clear of.
Comcast (CMCSA)
Market Cap: $113 billion
Formerly known as American Cable Systems, Comcast (NASDAQ: CMCSA) is a multinational telecommunications company offering a wide range of services.
Why Should You Sell CMCSA?
- Performance surrounding its domestic broadband customers has lagged its peers
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2%
- Underwhelming 8.6% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $30.69 per share, Comcast trades at 7.1x forward P/E. Read our free research report to see why you should think twice about including CMCSA in your portfolio.
Bright Horizons (BFAM)
Market Cap: $5.66 billion
Founded in 1986, Bright Horizons (NYSE: BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Should You Dump BFAM?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Estimated sales growth of 7.6% for the next 12 months implies demand will slow from its two-year trend
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Bright Horizons is trading at $99.59 per share, or 22.1x forward P/E. Dive into our free research report to see why there are better opportunities than BFAM.
American Outdoor Brands (AOUT)
Market Cap: $102.5 million
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Do We Think AOUT Will Underperform?
- Muted 2.6% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Earnings per share have contracted by 34.3% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
American Outdoor Brands’s stock price of $8.11 implies a valuation ratio of 77.2x forward P/E. Check out our free in-depth research report to learn more about why AOUT doesn’t pass our bar.
Stocks We Like More
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