The performance of consumer discretionary businesses is closely linked to economic cycles. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 6.1% over the past six months. This drawdown is a far cry from the S&P 500’s 5.3% ascent.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks we’re steering clear of.
La-Z-Boy (LZB)
Market Cap: $1.49 billion
The prized possession of every mancave, La-Z-Boy (NYSE: LZB) is a furniture company specializing in recliners, sofas, and seats.
Why Do We Avoid LZB?
- Sales tumbled by 5.3% annually over the last two years, showing consumer trends are working against its favor
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.9%
- Waning returns on capital imply its previous profit engines are losing steam
At $36.19 per share, La-Z-Boy trades at 11x forward P/E. Check out our free in-depth research report to learn more about why LZB doesn’t pass our bar.
Smith & Wesson (SWBI)
Market Cap: $356.3 million
With a history dating back to 1852, Smith & Wesson (NASDAQ: SWBI) is a firearms manufacturer known for its handguns and rifles.
Why Do We Think SWBI Will Underperform?
- Products and services aren't resonating with the market as its revenue declined by 2.2% annually over the last five years
- Sales were less profitable over the last five years as its earnings per share fell by 17.7% annually, worse than its revenue declines
- Cash burn makes us question whether it can achieve sustainable long-term growth
Smith & Wesson is trading at $8.05 per share, or 17.9x forward P/E. Dive into our free research report to see why there are better opportunities than SWBI.
Warner Bros. Discovery (WBD)
Market Cap: $27.01 billion
Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ: WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.
Why Do We Steer Clear of WBD?
- Annual sales declines of 4.2% for the past two years show its products and services struggled to connect with the market
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 30.9% annually
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Warner Bros. Discovery’s stock price of $10.99 implies a valuation ratio of 3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including WBD in your portfolio.
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