Most consumer discretionary businesses succeed or fail based on the broader economy. 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 7%. This performance was discouraging since the S&P 500 held steady.
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.
TEGNA (TGNA)
Market Cap: $2.70 billion
Spun out of Gannett in 2015, TEGNA (NYSE: TGNA) is a media company operating a network of television stations and digital platforms, focusing on local news and community content.
Why Do We Pass on TGNA?
- Annual sales declines of 2.8% for the past two years show its products and services struggled to connect with the market
- Sales are projected to tank by 9% over the next 12 months as its demand continues evaporating
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 8.8 percentage points
TEGNA’s stock price of $16.82 implies a valuation ratio of 8.1x forward P/E. To fully understand why you should be careful with TGNA, check out our full research report (it’s free).
Wynn Resorts (WYNN)
Market Cap: $9.52 billion
Founded by the former Mirage Resorts CEO, Wynn Resorts (NASDAQ: WYNN) is a global developer and operator of high-end hotels and casinos, known for its luxurious properties and premium guest services.
Why Are We Hesitant About WYNN?
- 3.3% annual revenue growth over the last five years was slower than its consumer discretionary peers
- ROIC of 1.9% reflects management’s challenges in identifying attractive investment opportunities
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $91.94 per share, Wynn Resorts trades at 18.7x forward P/E. If you’re considering WYNN for your portfolio, see our FREE research report to learn more.
Somnigroup (SGI)
Market Cap: $13.72 billion
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Is SGI Not Exciting?
- Sales trends were unexciting over the last two years as its 4.6% annual growth was below the typical consumer discretionary company
- Diminishing returns on capital suggest its earlier profit pools are drying up
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Somnigroup is trading at $65.78 per share, or 22.9x forward P/E. Dive into our free research report to see why there are better opportunities than SGI.
High-Quality Stocks for All Market Conditions
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
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