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 4.4%. This drawdown was disappointing since the S&P 500 climbed 4.1%.

While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. With that said, here are three consumer stocks best left ignored.

Carter's (CRI)

Market Cap: $1.11 billion

Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.

Why Should You Sell CRI?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
2. Estimated sales for the next 12 months are flat and imply a softer demand environment
3. Waning returns on capital imply its previous profit engines are losing steam

Carter’s stock price of $30.42 implies a valuation ratio of 8.6x forward P/E. Dive into our free research report to see why there are better opportunities than CRI.

E.W. Scripps (SSP)

Market Cap: $286.8 million

Founded as a chain of daily newspapers, E.W. Scripps (NASDAQ: SSP) is a diversified media enterprise operating a range of local television stations, national networks, and digital media platforms.

Why Do We Think SSP Will Underperform?

1. Muted 1.2% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 8.2 percentage points
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

E.W. Scripps is trading at $3.29 per share, or 1.2x forward EV-to-EBITDA. If you’re considering SSP for your portfolio, see our FREE research report to learn more.

American Airlines (AAL)

Market Cap: $8.25 billion

One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ: AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.

Why Do We Avoid AAL?

1. Performance surrounding its revenue passenger miles has lagged its peers
2. Underwhelming 0.8% return on capital reflects management’s difficulties in finding profitable growth opportunities
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $12.51 per share, American Airlines trades at 8.5x forward P/E. Check out our free in-depth research report to learn more about why AAL doesn’t pass our bar.

Stocks We Like More

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