The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 10.6% return was close to the S&P 500’s.

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. With that said, here are three consumer stocks we’re swiping left on.

Gray Television (GTN)

Market Cap: $519.8 million

Specializing in local media coverage, Gray Television (NYSE: GTN) is a broadcast company supplying digital media to various markets in the United States.

Why Are We Out on GTN?

1. Muted 9.1% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
3. High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Gray Television’s stock price of $4.84 implies a valuation ratio of 7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why GTN doesn’t pass our bar.

Topgolf Callaway (MODG)

Market Cap: $2.16 billion

Formed between the merger of Callaway and Topgolf, Topgolf Callaway (NYSE: MODG) sells golf equipment and operates technology-driven golf entertainment venues.

Why Do We Avoid MODG?

1. Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.3% for the last two years
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $11.47 per share, Topgolf Callaway trades at 5.4x forward EV-to-EBITDA. If you’re considering MODG for your portfolio, see our FREE research report to learn more.

Dave & Buster's (PLAY)

Market Cap: $591 million

Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ: PLAY) operates a chain of arcades providing immersive entertainment experiences.

Why Do We Think PLAY Will Underperform?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Dave & Buster's is trading at $16.87 per share, or 20.4x forward P/E. To fully understand why you should be careful with PLAY, check out our full research report (it’s free for active Edge members).

Stocks We Like More

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