Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 7% over the past six months. This drop was worse than the S&P 500’s 2.4% decline.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks we’re steering clear of.
Bright Horizons (BFAM)
Market Cap: $7.04 billion
Founded in 1986, Bright Horizons (NYSE: BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Do We Steer Clear of BFAM?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Underwhelming 4.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
Bright Horizons is trading at $122.96 per share, or 29.5x forward P/E. If you’re considering BFAM for your portfolio, see our FREE research report to learn more.
Acushnet (GOLF)
Market Cap: $4.18 billion
Producer of the acclaimed Titleist Pro V1 golf ball, Acushnet (NYSE: GOLF) is a design and manufacturing company specializing in performance-driven golf products.
Why Do We Pass on GOLF?
- Lackluster 2.2% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Acushnet’s stock price of $73.99 implies a valuation ratio of 19x forward P/E. Dive into our free research report to see why there are better opportunities than GOLF.
Harley-Davidson (HOG)
Market Cap: $3.02 billion
Founded in 1903, Harley-Davidson (NYSE: HOG) is an American motorcycle manufacturer known for its heavyweight motorcycles designed for cruising on highways.
Why Is HOG Risky?
- Sluggish trends in its motorcycles sold suggest customers aren’t adopting its solutions as quickly as the company hoped
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- 13× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $25.21 per share, Harley-Davidson trades at 7.5x forward P/E. Check out our free in-depth research report to learn more about why HOG doesn’t pass our bar.
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