Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 3%. This performance was disappointing since the S&P 500 held steady.

While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three consumer stocks we’re passing on.

Kontoor Brands (KTB)

Market Cap: $3.32 billion

Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE: KTB) is a clothing company known for its high-quality denim products.

Why Does KTB Worry Us?

1. Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
2. Projected sales growth of 2.2% for the next 12 months suggests sluggish demand
3. Earnings per share lagged its peers over the last five years as they only grew by 4.9% annually

Kontoor Brands’s stock price of $59.60 implies a valuation ratio of 11.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why KTB doesn’t pass our bar.

PENN Entertainment (PENN)

Market Cap: $2.50 billion

Established in 1982, PENN Entertainment (NASDAQ: PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.

Why Do We Steer Clear of PENN?

1. Annual revenue growth of 1.4% over the last two years was below our standards for the consumer discretionary sector
2. Earnings per share fell by 24.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $16.51 per share, PENN Entertainment trades at 30.2x forward price-to-earnings. To fully understand why you should be careful with PENN, check out our full research report (it’s free).

Scholastic (SCHL)

Market Cap: $587 million

Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ: SCHL) is an international company specializing in children's publishing, education, and media services.

Why Should You Sell SCHL?

1. Sales were flat over the last five years, indicating it's failed to expand its business
2. Sales over the last five years were less profitable as its earnings per share fell by 18.9% annually while its revenue was flat
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Scholastic is trading at $19.47 per share, or 8.9x forward price-to-earnings. Read our free research report to see why you should think twice about including SCHL in your portfolio.

Stocks We Like More

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.

Put yourself in the driver’s seat by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.