The performance of consumer discretionary businesses is closely linked to economic cycles. Thankfully for the industry, demand trends seem to be healthy as discretionary stocks have gained 10.3% over the past six months. This performance has nearly mirrored the S&P 500.
Although these companies have produced results lately, investors must be mindful because many are fads and only a few will stand the test of time. On that note, here are three consumer stocks we’re steering clear of.
Wynn Resorts (WYNN)
Market Cap: $13.05 billion
Founded by the former Mirage Resorts CEO, Wynn Resorts (NASDAQ: WYNN) is a global developer and operator of high-end hotels and casinos, known for its luxurious properties and premium guest services.
Why Does WYNN Give Us Pause?
- Lackluster 9.9% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Underwhelming 4% return on capital reflects management’s difficulties in finding profitable growth opportunities
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $126.75 per share, Wynn Resorts trades at 27.2x forward P/E. Dive into our free research report to see why there are better opportunities than WYNN.
Hyatt Hotels (H)
Market Cap: $13.88 billion
Founded in 1957, Hyatt Hotels (NYSE: H) is a global hospitality company with a portfolio of 20 premier brands and over 950 properties across 65 countries.
Why Do We Think Twice About H?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Operating margin of 4.9% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Negative returns on capital show management lost money while trying to expand the business
Hyatt Hotels is trading at $144.28 per share, or 47.2x forward P/E. To fully understand why you should be careful with H, check out our full research report (it’s free).
1-800-FLOWERS (FLWS)
Market Cap: $356 million
Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
Why Do We Avoid FLWS?
- Sales tumbled by 9.9% annually over the last two years, showing consumer trends are working against its favor
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 18.4% annually
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
1-800-FLOWERS’s stock price of $5.72 implies a valuation ratio of 19x forward P/E. If you’re considering FLWS for your portfolio, see our FREE research report to learn more.
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