The performance of consumer discretionary businesses is closely linked to economic cycles. This volatility leads to big swings in stock prices that have worked in their favor recently - over the past six months, the industry has returned 18.9% and beat the S&P 500 by 2.8 percentage points.
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. Taking that into account, here are three consumer stocks we’re passing on.
Charter (CHTR)
Market Cap: $36.35 billion
Operating as Spectrum, Charter (NASDAQ: CHTR) is a leading telecommunications company offering cable television, high-speed internet, and voice services across the United States.
Why Are We Wary of CHTR?
- Sluggish trends in its internet subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- ROIC of 9.8% reflects management’s challenges in identifying attractive investment opportunities
Charter’s stock price of $264.97 implies a valuation ratio of 6.4x forward P/E. Check out our free in-depth research report to learn more about why CHTR doesn’t pass our bar.
PENN Entertainment (PENN)
Market Cap: $2.69 billion
Established in 1982, PENN Entertainment (NASDAQ: PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.
Why Should You Sell PENN?
- Muted 1.4% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Negative free cash flow raises questions about the return timeline for its investments
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $19.04 per share, PENN Entertainment trades at 19.8x forward P/E. Read our free research report to see why you should think twice about including PENN in your portfolio.
JLL (JLL)
Market Cap: $14.86 billion
Founded in 1999 through the merger of Jones Lang Wootton and LaSalle Partners, JLL (NYSE: JLL) is a company specializing in real estate advisory and investment management services.
Why Do We Pass on JLL?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.9% over the last five years was below our standards for the consumer discretionary sector
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.2% for the last two years
- ROIC of 7.8% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
JLL is trading at $312.54 per share, or 17.6x forward P/E. If you’re considering JLL for your portfolio, see our FREE research report to learn more.
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