The performance of consumer discretionary businesses is closely linked to economic cycles. 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 22.7% and beat the S&P 500 by 5.8 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 we’re steering clear of.
Disney (DIS)
Market Cap: $202.6 billion
Founded by brothers Walt and Roy, Disney (NYSE: DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.
Why Do We Pass on DIS?
- Annual sales growth of 4.2% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- The company’s capital intensity will likely increase as its free cash flow margin is anticipated to drop by 2.6 percentage points over the next year
- Underwhelming 5.4% return on capital reflects management’s difficulties in finding profitable growth opportunities
Disney’s stock price of $111.95 implies a valuation ratio of 20.2x forward price-to-earnings. Check out our free in-depth research report to learn more about why DIS doesn’t pass our bar.
Warner Bros. Discovery (WBD)
Market Cap: $25.02 billion
Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ: WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.
Why Do We Think WBD Will Underperform?
- Products and services have few die-hard fans as sales have declined by 5.7% annually over the last two years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 16.3% annually while its revenue grew
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Warner Bros. Discovery is trading at $10.21 per share, or 17x forward price-to-earnings. To fully understand why you should be careful with WBD, check out our full research report (it’s free).
fuboTV (FUBO)
Market Cap: $1.37 billion
Originally launched as a soccer streaming platform, fuboTV (NYSE: FUBO) is a video streaming service specializing in live sports, news, and entertainment content.
Why Are We Wary of FUBO?
- Historical operating losses point to an inefficient cost structure
- Cash-burning history makes us doubt the long-term viability of its business model
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $4.04 per share, fuboTV trades at 0.8x forward price-to-sales. If you’re considering FUBO for your portfolio, see our FREE research report to learn more.
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