Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 3.6%. This performance was disappointing since the S&P 500 climbed 4.5%.

A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks we’re passing on.

Crocs (CROX)

Market Cap: $5.78 billion

Founded in 2002, Crocs (NASDAQ: CROX) sells casual footwear and is known for its iconic clog shoe.

Why Does CROX Give Us Pause?

1. Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
2. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.2 percentage points
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Crocs’s stock price of $102.77 implies a valuation ratio of 8.2x forward P/E. Check out our free in-depth research report to learn more about why CROX doesn’t pass our bar.

Hilton Grand Vacations (HGV)

Market Cap: $3.82 billion

Spun off from Hilton Worldwide in 2017, Hilton Grand Vacations (NYSE: HGV) is a global timeshare company that provides travel experiences for its customers through its timeshare resorts and club membership programs.

Why Do We Think Twice About HGV?

1. 11.6% annual revenue growth over the last two years was slower than its consumer discretionary peers
2. ROIC of 3.1% reflects management’s challenges in identifying attractive investment opportunities
3. High net-debt-to-EBITDA ratio of 11× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $41.75 per share, Hilton Grand Vacations trades at 11.2x forward P/E. Dive into our free research report to see why there are better opportunities than HGV.

Warner Music Group (WMG)

Market Cap: $14.18 billion

Launching the careers of legendary artists like Frank Sinatra, Warner Music Group (NASDAQ: WMG) is a music company managing a diverse portfolio of artists, recordings, and music publishing services worldwide.

Why Is WMG Not Exciting?

1. Muted 4.4% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Projected sales growth of 3.7% for the next 12 months suggests sluggish demand
3. Underwhelming 10.6% return on capital reflects management’s difficulties in finding profitable growth opportunities

Warner Music Group is trading at $27.25 per share, or 9.4x forward EV-to-EBITDA. To fully understand why you should be careful with WMG, check out our full research report (it’s free).

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