Most consumer discretionary businesses succeed or fail based on the broader economy. This volatility leads to big swings in stock prices that have worked in their favor recently - over the past six months, the industry has returned 16.3% and beat the S&P 500 by 4.6 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. With that said, here are three consumer stocks that may face trouble.
Bally's (BALY)
Market Cap: $804.3 million
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE: BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
Why Is BALY Risky?
- Annual revenue growth of 2% over the last two years was below our standards for the consumer discretionary sector
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $16.33 per share, Bally's trades at 11.9x forward EV-to-EBITDA. If you’re considering BALY for your portfolio, see our FREE research report to learn more.
Clarus (CLAR)
Market Cap: $128.6 million
Initially a financial services business, Clarus (NASDAQ: CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.
Why Are We Out on CLAR?
- 4.2% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Clarus’s stock price of $3.36 implies a valuation ratio of 22.3x forward P/E. Dive into our free research report to see why there are better opportunities than CLAR.
Verizon (VZ)
Market Cap: $170.7 billion
Formed in 1984 as Bell Atlantic after the breakup of Bell System into seven companies, Verizon (NYSE: VZ) is a telecom giant providing a range of communications and internet services.
Why Do We Pass on VZ?
- Underwhelming customer growth over the past two years shows the company faced challenges in winning new contracts
- Free cash flow margin is not anticipated to grow over the next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Verizon is trading at $40.42 per share, or 8.6x forward P/E. Read our free research report to see why you should think twice about including VZ in your portfolio.
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