The performance of consumer discretionary businesses is closely linked to economic cycles. Thankfully for the industry, demand trends seem to be healthy as discretionary stocks have gained 10.9% over the past six months. This performance has nearly mirrored the S&P 500.
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 steering clear of.
The New York Times (NYT)
Market Cap: $10.31 billion
Founded in 1851, The New York Times (NYSE: NYT) is an American media organization known for its influential newspaper and expansive digital journalism platforms.
Why Are We Wary of NYT?
- Number of subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Estimated sales growth of 7.7% for the next 12 months is soft and implies weaker demand
- Eroding returns on capital suggest its historical profit centers are aging
The New York Times’s stock price of $63.66 implies a valuation ratio of 24.7x forward P/E. If you’re considering NYT for your portfolio, see our FREE research report to learn more.
Lincoln Educational (LINC)
Market Cap: $626.8 million
Established in 1946, Lincoln Educational (NASDAQ: LINC) is a provider of specialized technical training in the United States, offering career-oriented programs to provide practical skills required in the workforce.
Why Do We Steer Clear of LINC?
- Number of enrolled students 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
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $19.88 per share, Lincoln Educational trades at 26.4x forward P/E. Read our free research report to see why you should think twice about including LINC in your portfolio.
Carnival (CCL)
Market Cap: $33.01 billion
Boasting outrageous amenities like a planetarium on board its ships, Carnival (NYSE: CCL) is one of the world's largest leisure travel companies and a prominent player in the cruise industry.
Why Does CCL Worry Us?
- Sluggish trends in its passenger cruise days suggest customers aren’t adopting its solutions as quickly as the company hoped
- Estimated sales growth of 5.1% for the next 12 months implies demand will slow from its two-year trend
- Negative returns on capital show that some of its growth strategies have backfired
Carnival is trading at $25.45 per share, or 10.6x forward P/E. To fully understand why you should be careful with CCL, check out our full research report (it’s free for active Edge members).
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