Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause the industry to underperform when macro uncertainty enters the fray, and over the past six months, its 14.8% return has fallen short of the S&P 500’s 19.5% gain.
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 we’re steering clear of.
Caesars Entertainment (CZR)
Market Cap: $3.91 billion
Formerly Eldorado Resorts, Caesars Entertainment (NASDAQ: CZR) is a global gaming and hospitality company operating numerous casinos, hotels, and resort properties.
Why Does CZR Give Us Pause?
- Products and services fail to spark excitement with consumers, as seen in its flat sales over the last two years
- Low free cash flow margin of 1.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Caesars Entertainment is trading at $19.16 per share, or 56.2x forward P/E. If you’re considering CZR for your portfolio, see our FREE research report to learn more.
Leggett & Platt (LEG)
Market Cap: $1.18 billion
Founded in 1883, Leggett & Platt (NYSE: LEG) is a diversified manufacturer of products and components for various industries.
Why Should You Sell LEG?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Sales over the last five years were less profitable as its earnings per share fell by 12.7% annually while its revenue was flat
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Leggett & Platt’s stock price of $8.72 implies a valuation ratio of 8.1x forward P/E. To fully understand why you should be careful with LEG, check out our full research report (it’s free for active Edge members).
Sphere Entertainment (SPHR)
Market Cap: $2.58 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Should You Dump SPHR?
- Lackluster 8.5% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Poor expense management has led to operating margin losses
- Earnings per share fell by 50.8% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
At $71.50 per share, Sphere Entertainment trades at 10.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SPHR doesn’t pass our bar.
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