The performance of consumer discretionary businesses is closely linked to economic cycles. Thankfully for the industry, all signs are pointing up as discretionary stocks have gained 13.9% over the past six months, beating the S&P 500’s 10.5% return.
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 passing on.
Tapestry (TPR)
Market Cap: $21.19 billion
Originally founded as Coach, Tapestry (NYSE: TPR) is an American fashion conglomerate with a portfolio of luxury brands offering high-quality accessories and fashion products.
Why Do We Avoid TPR?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Anticipated sales growth of 3% for the next year implies demand will be shaky
- Eroding returns on capital suggest its historical profit centers are aging
Tapestry is trading at $101.09 per share, or 18.7x forward P/E. Dive into our free research report to see why there are better opportunities than TPR.
Xponential Fitness (XPOF)
Market Cap: $295.2 million
Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE: XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.
Why Is XPOF Risky?
- Muted 5.8% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Persistent operating margin losses suggest the business manages its expenses poorly
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Xponential Fitness’s stock price of $8.41 implies a valuation ratio of 5.6x forward P/E. If you’re considering XPOF for your portfolio, see our FREE research report to learn more.
Verizon (VZ)
Market Cap: $186.5 billion
Formed in 1984 as Bell Atlantic after the breakup of Bell System into seven companies, Verizon (NYSE: VZ) is a telecom giant providing a range of communications and internet services.
Why Should You Sell VZ?
- Weak customer trends over the past two years suggest it may need to improve its products, pricing, or go-to-market strategy
- Projected sales growth of 2.2% for the next 12 months suggests sluggish demand
- Projected 1.8 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
At $44.26 per share, Verizon trades at 9.4x forward P/E. To fully understand why you should be careful with VZ, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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