Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 13.4% return has lagged the S&P 500 by 2.9 percentage points.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three consumer stocks we’re passing on.
Levi's (LEVI)
Market Cap: $8.47 billion
Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE: LEVI) is an apparel company renowned for its iconic denim products and classic American style.
Why Should You Dump LEVI?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Projected sales growth of 3.1% for the next 12 months suggests sluggish demand
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $21.54 per share, Levi's trades at 15.6x forward P/E. If you’re considering LEVI for your portfolio, see our FREE research report to learn more.
Choice Hotels (CHH)
Market Cap: $4.38 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Do We Pass on CHH?
- Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
- Projected sales are flat for the next 12 months, implying demand will slow from its two-year trend
- Diminishing returns on capital suggest its earlier profit pools are drying up
Choice Hotels is trading at $95.41 per share, or 13.6x forward P/E. Check out our free in-depth research report to learn more about why CHH doesn’t pass our bar.
Brunswick (BC)
Market Cap: $4.16 billion
Formerly known as Brunswick-Balke-Collender Company, Brunswick (NYSE: BC) is a designer and manufacturer of recreational marine products, including boats, engines, and marine parts.
Why Do We Avoid BC?
- Products and services aren't resonating with the market as its revenue declined by 11.5% annually over the last two years
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 6.3 percentage points over the next year
- Eroding returns on capital suggest its historical profit centers are aging
Brunswick’s stock price of $65.04 implies a valuation ratio of 16.4x forward P/E. To fully understand why you should be careful with BC, check out our full research report (it’s free for active Edge members).
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