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 1.6%. This drop was disheartening since the S&P 500 gained 6.2%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one consumer stock boasting a durable advantage and two we’re passing on.
Two Consumer DiscretionaryStocks to Sell:
Purple (PRPL)
Market Cap: $82.65 million
Founded by two brothers, Purple (NASDAQ: PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Is PRPL Risky?
- Annual sales declines of 6.3% for the past two years show its products and services struggled to connect with the market
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Purple’s stock price of $0.81 implies a valuation ratio of 25.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why PRPL doesn’t pass our bar.
AMC Entertainment (AMC)
Market Cap: $1.28 billion
With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE: AMC) operates movie theaters primarily in the US and Europe.
Why Are We Cautious About AMC?
- Annual revenue declines of 2.7% over the last five years indicate problems with its market positioning
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
AMC Entertainment is trading at $2.95 per share, or 2.1x forward EV-to-EBITDA. If you’re considering AMC for your portfolio, see our FREE research report to learn more.
One Consumer Discretionary Stock to Watch:
Deckers (DECK)
Market Cap: $15.87 billion
Established in 1973, Deckers (NYSE: DECK) is a footwear and apparel conglomerate with a portfolio of lifestyle and performance brands.
Why Are We Positive On DECK?
- Brand and reputation resonate with consumers, as seen in its above-market 18.5% annual sales growth over the last five years
- Share repurchases over the last five years enabled its annual earnings per share growth of 31.3% to outpace its revenue gains
- Rising returns on capital show management is finding more attractive investment opportunities
At $106.20 per share, Deckers trades at 17x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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