Most consumer discretionary businesses succeed or fail based on the broader economy. Thankfully for the industry, demand trends seem to be healthy as discretionary stocks have gained 4% over the past six months. This performance has nearly mirrored the S&P 500.

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. On that note, here are three consumer stocks we’re passing on.

Wyndham (WH)

Market Cap: $8.26 billion

Established in 1981, Wyndham (NYSE: WH) is a global hotel franchising company with over 9,000 hotels across nearly 95 countries on six continents.

Why Is WH Not Exciting?

1. Weak revenue per room over the past two years indicates challenges in maintaining pricing power and occupancy rates
2. Anticipated sales growth of 6.5% for the next year implies demand will be shaky
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Wyndham is trading at $106.74 per share, or 22.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why WH doesn’t pass our bar.

Travel + Leisure (TNL)

Market Cap: $3.70 billion

Formerly known as Wyndham Destinations, Travel + Leisure (NYSE: TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.

Why Do We Think TNL Will Underperform?

1. Sluggish trends in its tours conducted suggest customers aren’t adopting its solutions as quickly as the company hoped
2. ROIC of 7.9% reflects management’s challenges in identifying attractive investment opportunities
3. High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $55.18 per share, Travel + Leisure trades at 8.6x forward price-to-earnings. If you’re considering TNL for your portfolio, see our FREE research report to learn more.

Playa Hotels & Resorts (PLYA)

Market Cap: $1.64 billion

Sporting a roster of beachfront properties, Playa Hotels & Resorts (NASDAQ: PLYA) is an owner, operator, and developer of all-inclusive resorts in prime vacation destinations.

Why Are We Wary of PLYA?

1. Softer revenue per room over the past two years suggests it might have to invest in new amenities such as restaurants and bars to attract customers
2. Demand will likely fall over the next 12 months as Wall Street expects flat revenue
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Playa Hotels & Resorts’s stock price of $13.34 implies a valuation ratio of 26.9x forward price-to-earnings. To fully understand why you should be careful with PLYA, check out our full research report (it’s free).

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