Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 9.6%. This performance was disheartening since the S&P 500 stood firm.

While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three consumer stocks we’re passing on.

Sirius XM (SIRI)

Market Cap: $7.50 billion

Known for its commercial-free music channels, Sirius XM (NASDAQ: SIRI) is a broadcasting company that provides satellite radio and online radio services across North America.

Why Are We Out on SIRI?

1. Sales trends were unexciting over the last five years as its 1.3% annual growth was below the typical consumer discretionary company
2. Free cash flow margin is forecasted to grow by 1.3 percentage points in the coming year, potentially giving the company more chips to play with
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Sirius XM is trading at $22.37 per share, or 7.3x forward P/E. Check out our free in-depth research report to learn more about why SIRI doesn’t pass our bar.

Offerpad (OPAD)

Market Cap: $34.85 million

Known for giving homeowners cash offers within 24 hours, Offerpad (NYSE: OPAD) operates a tech-enabled platform specializing in direct home buying and selling solutions.

Why Do We Think OPAD Will Underperform?

1. Sluggish trends in its homes sold suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 15.9 percentage points
3. Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes

Offerpad’s stock price of $0.73 implies a valuation ratio of 0.1x forward price-to-sales. If you’re considering OPAD for your portfolio, see our FREE research report to learn more.

American Outdoor Brands (AOUT)

Market Cap: $102.3 million

Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.

Why Do We Avoid AOUT?

1. Annual sales declines of 4.3% for the past five years show its products and services struggled to connect with the market
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.3% for the last two years
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $8.12 per share, American Outdoor Brands trades at 31.2x forward P/E. To fully understand why you should be careful with AOUT, check out our full research report (it’s free).

Stocks We Like More

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