Most consumer discretionary businesses succeed or fail based on the broader economy. 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 19.6% and beat the S&P 500 by 4.8 percentage points.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks we’re swiping left on.
Mohawk Industries (MHK)
Market Cap: $7.94 billion
Established in 1878, Mohawk Industries (NYSE: MHK) is a leading producer of floor-covering products for both residential and commercial applications.
Why Is MHK Risky?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Mohawk Industries is trading at $127.86 per share, or 12.7x forward P/E. To fully understand why you should be careful with MHK, check out our full research report (it’s free).
Compass (COMP)
Market Cap: $4.15 billion
Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass (NYSE: COMP) is a digital-first company operating a residential real estate brokerage in the United States.
Why Are We Wary of COMP?
- Number of principal agents has disappointed over the past two years, indicating weak demand for its offerings
- Persistent operating margin losses suggest the business manages its expenses poorly
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.4% for the last two years
At $7.98 per share, Compass trades at 17.8x forward P/E. Read our free research report to see why you should think twice about including COMP in your portfolio.
Mister Car Wash (MCW)
Market Cap: $1.75 billion
Formerly known as Hotshine Holdings, Mister Car Wash (NYSE: MCW) offers car washes across the United States through its conveyorized service.
Why Do We Avoid MCW?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Mister Car Wash’s stock price of $5.44 implies a valuation ratio of 11.4x forward P/E. Check out our free in-depth research report to learn more about why MCW doesn’t pass our bar.
Stocks We Like More
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