Most consumer discretionary businesses succeed or fail based on the broader economy. Lately, it seems like demand trends have worked in their favor as the industry has returned 10.3% over the past six months, similar to the S&P 500.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks we’re swiping left on.
G-III (GIII)
Market Cap: $1.17 billion
Founded as a small leather goods business, G-III (NASDAQ: GIII) is a fashion and apparel conglomerate with a diverse portfolio of brands.
Why Is GIII Risky?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Sales are projected to tank by 1.1% over the next 12 months as demand evaporates further
- ROIC of 8.3% reflects management’s challenges in identifying attractive investment opportunities
G-III’s stock price of $27.07 implies a valuation ratio of 7.1x forward P/E. If you’re considering GIII for your portfolio, see our FREE research report to learn more.
Boyd Gaming (BYD)
Market Cap: $6.96 billion
Run by the Boyd family, Boyd Gaming (NYSE: BYD) is a diversified operator of gaming entertainment properties across the United States, offering casino games, hotel accommodations, and dining.
Why Should You Sell BYD?
- Annual revenue growth of 4.6% over the last two years was below our standards for the consumer discretionary sector
- Forecasted revenue decline of 11.6% for the upcoming 12 months implies demand will fall off a cliff
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $87.12 per share, Boyd Gaming trades at 13.1x forward P/E. Check out our free in-depth research report to learn more about why BYD doesn’t pass our bar.
Somnigroup (SGI)
Market Cap: $17.7 billion
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Does SGI Fall Short?
- Sales trends were unexciting over the last two years as its 10.1% annual growth was below the typical consumer discretionary company
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 9.6% for the last two years
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Somnigroup is trading at $84.35 per share, or 30.3x forward P/E. Dive into our free research report to see why there are better opportunities than SGI.
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