The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 3%. This drawdown was disappointing since the S&P 500 held steady.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks best left ignored.
Carnival (CCL)
Market Cap: $24.75 billion
Boasting outrageous amenities like a planetarium on board its ships, Carnival (NYSE: CCL) is one of the world's largest leisure travel companies and a prominent player in the cruise industry.
Why Do We Pass on CCL?
- Sizable revenue base leads to growth challenges as its 3.7% annual revenue increases over the last five years fell short of other consumer discretionary companies
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 20.9% annually
- Negative returns on capital show management lost money while trying to expand the business
Carnival’s stock price of $19.44 implies a valuation ratio of 10.9x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than CCL.
Mattel (MAT)
Market Cap: $6.82 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 Is MAT Risky?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Projected sales growth of 1.8% for the next 12 months suggests sluggish demand
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $20.53 per share, Mattel trades at 13.4x forward price-to-earnings. To fully understand why you should be careful with MAT, check out our full research report (it’s free).
Universal Technical Institute (UTI)
Market Cap: $1.46 billion
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
Why Do We Steer Clear of UTI?
- Free cash flow margin is forecasted to shrink by 2.6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- ROIC of 11% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Universal Technical Institute is trading at $26.70 per share, or 23.9x forward price-to-earnings. If you’re considering UTI for your portfolio, see our FREE research report to learn more.
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