Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 9.9% over the past six months. This performance was seriously disheartening since the S&P 500 held steady.

A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks that may face trouble.

Warner Music Group (WMG)

Market Cap: $14.27 billion

Launching the careers of legendary artists like Frank Sinatra, Warner Music Group (NASDAQ: WMG) is a music company managing a diverse portfolio of artists, recordings, and music publishing services worldwide.

Why Should You Sell WMG?

1. Muted 8.7% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Free cash flow margin is forecasted to grow by 1.6 percentage points in the coming year, potentially giving the company more chips to play with
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Warner Music Group is trading at $27.57 per share, or 17.5x forward P/E. If you’re considering WMG for your portfolio, see our FREE research report to learn more.

Marcus & Millichap (MMI)

Market Cap: $971.6 million

Founded in 1971, Marcus & Millichap (NYSE: MMI) specializes in commercial real estate investment sales, financing, research, and advisory services.

Why Should You Dump MMI?

1. Muted 1% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Poor free cash flow margin of 5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Marcus & Millichap’s stock price of $25.43 implies a valuation ratio of 39x forward P/E. Read our free research report to see why you should think twice about including MMI in your portfolio.

Service International (SCI)

Market Cap: $11.07 billion

Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.

Why Do We Think SCI Will Underperform?

1. Number of funeral services performed has disappointed over the past two years, indicating weak demand for its offerings
2. Low free cash flow margin of 13.1% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $79.52 per share, Service International trades at 18.7x forward P/E. Check out our free in-depth research report to learn more about why SCI doesn’t pass our bar.

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