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 1.9% over the past six months. This performance was disappointing since the S&P 500 climbed 5.8%.
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. Taking that into account, here are three consumer stocks we’re passing on.
Rush Street Interactive (RSI)
Market Cap: $1.83 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.
Why Are We Wary of RSI?
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
At $19.44 per share, Rush Street Interactive trades at 50.9x forward P/E. If you’re considering RSI for your portfolio, see our FREE research report to learn more.
Carriage Services (CSV)
Market Cap: $752.6 million
Established in 1991, Carriage Services (NYSE: CSV) is a provider of funeral and cemetery services in the United States.
Why Does CSV Fall Short?
- Muted 4.3% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Demand will likely fall over the next 12 months as Wall Street expects flat revenue
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
Carriage Services’s stock price of $47.94 implies a valuation ratio of 11.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including CSV in your portfolio.
Guess (GES)
Market Cap: $707.9 million
Flexing the iconic upside-down triangle logo with a question mark, Guess (NYSE: GES) is a global fashion brand known for its trendy clothing, accessories, and denim wear.
Why Is GES Risky?
- Muted 4.9% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Guess is trading at $13.61 per share, or 8.3x forward P/E. Check out our free in-depth research report to learn more about why GES doesn’t pass our bar.
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