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 6.1% 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 swiping left on.

Hilton (HLT)

Market Cap: $62.34 billion

Founded in 1919, Hilton Worldwide (NYSE: HLT) is a global hospitality company with a portfolio of hotel brands.

Why Are We Cautious About HLT?

1. Sizable revenue base leads to growth challenges as its 3.4% annual revenue increases over the last five years fell short of other consumer discretionary companies
2. Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
3. Estimated sales growth of 8.6% for the next 12 months implies demand will slow from its two-year trend

Hilton is trading at $259.10 per share, or 32.4x forward price-to-earnings. To fully understand why you should be careful with HLT, check out our full research report (it’s free).

Choice Hotels (CHH)

Market Cap: $6.64 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 Are We Hesitant About CHH?

1. Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
2. Estimated sales growth of 3.8% for the next 12 months implies demand will slow from its two-year trend
3. Eroding returns on capital suggest its historical profit centers are aging

Choice Hotels’s stock price of $144.19 implies a valuation ratio of 20.2x forward price-to-earnings. Read our free research report to see why you should think twice about including CHH in your portfolio.

CBRE (CBRE)

Market Cap: $41.32 billion

Established in 1906, CBRE (NYSE: CBRE) is one of the largest commercial real estate services firms in the world.

Why Do We Avoid CBRE?

1. Scale is a double-edged sword because it limits the company's growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 7.7% for the last two years
2. Operating margin of 3.7% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
3. Poor free cash flow margin of 2.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

At $132.80 per share, CBRE trades at 23.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why CBRE doesn’t pass our bar.

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