Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 8.1% return was close to the S&P 500’s.
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 best left ignored.
Churchill Downs (CHDN)
Market Cap: $8.72 billion
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ: CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
Why Are We Wary of CHDN?
- Estimated sales growth of 7.6% for the next 12 months implies demand will slow from its two-year trend
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3% for the last two years
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Churchill Downs is trading at $119.64 per share, or 17x forward price-to-earnings. If you’re considering CHDN for your portfolio, see our FREE research report to learn more.
La-Z-Boy (LZB)
Market Cap: $1.87 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Do We Think LZB Will Underperform?
- Products and services have few die-hard fans as sales have declined by 8% annually over the last two years
- Anticipated sales growth of 1.8% for the next year implies demand will be shaky
- Waning returns on capital imply its previous profit engines are losing steam
La-Z-Boy’s stock price of $45.16 implies a valuation ratio of 13.5x forward price-to-earnings. Read our free research report to see why you should think twice about including LZB in your portfolio.
Marcus & Millichap (MMI)
Market Cap: $1.50 billion
Founded in 1971, Marcus & Millichap (NYSE: MMI) specializes in commercial real estate investment sales, financing, research, and advisory services.
Why Do We Steer Clear of MMI?
- Products and services aren't resonating with the market as its revenue declined by 2.9% annually over the last five years
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $38.01 per share, Marcus & Millichap trades at 480.9x forward price-to-earnings. Check out our free in-depth research report to learn more about why MMI doesn’t pass our bar.
Stocks We Like More
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