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 16.4% and beat the S&P 500 by 7 percentage points.

Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. Keeping that in mind, here are three consumer stocks we’re passing on.

Nike (NKE)

Market Cap: $113.6 billion

Originally selling Japanese Onitsuka Tiger sneakers as Blue Ribbon Sports, Nike (NYSE: NKE) is a global titan in athletic footwear, apparel, equipment, and accessories.

Why Do We Steer Clear of NKE?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Sales are projected to tank by 7.1% over the next 12 months as demand evaporates further
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $76.72 per share, Nike trades at 27.6x forward price-to-earnings. Check out our free in-depth research report to learn more about why NKE doesn’t pass our bar.

Solo Brands (DTC)

Market Cap: $52.03 million

Started through a Kickstarter campaign, Solo Brands (NYSE: DTC) is a provider of outdoor and recreational products.

Why Should You Dump DTC?

1. Products and services have few die-hard fans as sales have declined by 2.1% annually over the last two years
2. Performance over the past four years shows its incremental sales were much less profitable, as its earnings per share fell by 18.1% annually
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Solo Brands is trading at $0.90 per share, or 2.4x forward price-to-earnings. Read our free research report to see why you should think twice about including DTC in your portfolio.

Clarus (CLAR)

Market Cap: $188.4 million

Initially a financial services business, Clarus (NASDAQ: CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.

Why Do We Think CLAR Will Underperform?

1. Sales tumbled by 23.6% annually over the last two years, showing consumer trends are working against its favor
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 16.1% annually while its revenue grew
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Clarus’s stock price of $4.91 implies a valuation ratio of 11.5x forward price-to-earnings. To fully understand why you should be careful with CLAR, check out our full research report (it’s free).

Stocks We Like More

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