The performance of consumer discretionary businesses is closely linked to economic cycles. Thankfully for the industry, demand trends seem to be healthy as discretionary stocks have gained 10.9% over the past six months. This performance has nearly mirrored the S&P 500.

Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re steering clear of.

The New York Times (NYT)

Market Cap: $10.31 billion

Founded in 1851, The New York Times (NYSE: NYT) is an American media organization known for its influential newspaper and expansive digital journalism platforms.

Why Are We Wary of NYT?

1. Number of subscribers has disappointed over the past two years, indicating weak demand for its offerings
2. Estimated sales growth of 7.7% for the next 12 months is soft and implies weaker demand
3. Eroding returns on capital suggest its historical profit centers are aging

The New York Times’s stock price of $63.66 implies a valuation ratio of 24.7x forward P/E. If you’re considering NYT for your portfolio, see our FREE research report to learn more.

Lincoln Educational (LINC)

Market Cap: $626.8 million

Established in 1946, Lincoln Educational (NASDAQ: LINC) is a provider of specialized technical training in the United States, offering career-oriented programs to provide practical skills required in the workforce.

Why Do We Steer Clear of LINC?

1. Number of enrolled students has disappointed over the past two years, indicating weak demand for its offerings
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

At $19.88 per share, Lincoln Educational trades at 26.4x forward P/E. Read our free research report to see why you should think twice about including LINC in your portfolio.

Carnival (CCL)

Market Cap: $33.01 billion

Boasting outrageous amenities like a planetarium on board its ships, Carnival (NYSE: CCL) is one of the world's largest leisure travel companies and a prominent player in the cruise industry.

Why Does CCL Worry Us?

1. Sluggish trends in its passenger cruise days suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Estimated sales growth of 5.1% for the next 12 months implies demand will slow from its two-year trend
3. Negative returns on capital show that some of its growth strategies have backfired

Carnival is trading at $25.45 per share, or 10.6x forward P/E. To fully understand why you should be careful with CCL, check out our full research report (it’s free for active Edge members).

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