The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 1.9%. This drawdown was disappointing since the S&P 500 climbed 5.7%.

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 swiping left on.

Churchill Downs (CHDN)

Market Cap: $7.26 billion

Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ: CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.

Why Does CHDN Fall Short?

1. Muted 13.6% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Estimated sales growth of 5.1% for the next 12 months implies demand will slow from its two-year trend
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Churchill Downs’s stock price of $104.04 implies a valuation ratio of 15.4x forward P/E. Check out our free in-depth research report to learn more about why CHDN doesn’t pass our bar.

Lovesac (LOVE)

Market Cap: $288.5 million

Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.

Why Is LOVE Not Exciting?

1. Annual revenue growth of 1.7% over the last two years was below our standards for the consumer discretionary sector
2. Low free cash flow margin of 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 imply its previous profit engines are losing steam

Lovesac is trading at $20.22 per share, or 5.8x forward EV-to-EBITDA. To fully understand why you should be careful with LOVE, check out our full research report (it’s free).

Funko (FNKO)

Market Cap: $159.8 million

Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.

Why Are We Out on FNKO?

1. Products and services have few die-hard fans as sales have declined by 9.7% annually over the last two years
2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $3 per share, Funko trades at 14.3x forward P/E. Check out our free in-depth research report to learn more about why FNKO doesn’t pass our bar.

Stocks We Like More

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