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 12.3%. This drop was significantly worse than the S&P 500’s 2.1% decline.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks we’re steering clear of.
Lovesac (LOVE)
Market Cap: $283.1 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Does LOVE Give Us Pause?
- Lackluster 2.2% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 1.5 percentage points over the next year
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Lovesac’s stock price of $18.96 implies a valuation ratio of 42x forward P/E. To fully understand why you should be careful with LOVE, check out our full research report (it’s free).
Hilton (HLT)
Market Cap: $58.65 billion
Founded in 1919, Hilton Worldwide (NYSE: HLT) is a global hospitality company with a portfolio of hotel brands.
Why Do We Think Twice About HLT?
- Annual sales growth of 4.3% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Estimated sales growth of 6.8% for the next 12 months implies demand will slow from its two-year trend
At $247.68 per share, Hilton trades at 30.2x forward P/E. Read our free research report to see why you should think twice about including HLT in your portfolio.
Latham (SWIM)
Market Cap: $694.7 million
Started as a family business, Latham (NASDAQ: SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.
Why Are We Wary of SWIM?
- Annual revenue declines of 10.9% over the last two years indicate problems with its market positioning
- Operating margin of 3.4% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Negative returns on capital show that some of its growth strategies have backfired
Latham is trading at $6.26 per share, or 43x forward P/E. Check out our free in-depth research report to learn more about why SWIM doesn’t pass our bar.
Stocks We Like More
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