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 20.4% over the past six months, outpacing S&P 500 by 7 percentage points.
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.
Target Hospitality (TH)
Market Cap: $820.2 million
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.
Why Should You Sell TH?
- Demand for its offerings was relatively low as its number of utilized beds has underwhelmed
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 10.1% annually
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Target Hospitality’s stock price of $8.22 implies a valuation ratio of 15.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than TH.
Mattel (MAT)
Market Cap: $6.15 billion
Known for the creation of iconic toys such as Barbie and Hotwheels, Mattel (NASDAQ: MAT) is a global children's entertainment company specializing in the design and production of consumer products.
Why Do We Think MAT Will Underperform?
- Sales trends were unexciting over the last five years as its 3.3% annual growth was below the typical consumer discretionary company
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $19.77 per share, Mattel trades at 11.7x forward P/E. To fully understand why you should be careful with MAT, check out our full research report (it’s free for active Edge members).
eXp World (EXPI)
Market Cap: $1.56 billion
Founded in 2009, eXp World (NASDAQ: EXPI) is a real estate company known for its virtual, cloud-based approach to real estate brokerage.
Why Are We Out on EXPI?
- Sluggish trends in its transactions suggest customers aren’t adopting its solutions as quickly as the company hoped
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 25% annually while its revenue grew
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.4% for the last two years
eXp World is trading at $9.88 per share, or 19.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including EXPI in your portfolio.
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