The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 6.5% return was close to the S&P 500’s.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks that may face trouble.
Somnigroup (SGI)
Market Cap: $14.39 billion
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Is SGI Risky?
- Muted 14.5% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Free cash flow margin is not anticipated to grow over the next year
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Somnigroup’s stock price of $68.40 implies a valuation ratio of 22.1x forward P/E. If you’re considering SGI for your portfolio, see our FREE research report to learn more.
Hilton (HLT)
Market Cap: $72.41 billion
Founded in 1919, Hilton Worldwide (NYSE: HLT) is a global hospitality company with a portfolio of hotel brands.
Why Do We Think HLT Will Underperform?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Operating margin of 22.3% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Poor free cash flow margin of 17.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Hilton is trading at $322.12 per share, or 33.5x forward P/E. Dive into our free research report to see why there are better opportunities than HLT.
Smith & Wesson (SWBI)
Market Cap: $648.5 million
With a history dating back to 1852, Smith & Wesson (NASDAQ: SWBI) is a firearms manufacturer known for its handguns and rifles.
Why Are We Out on SWBI?
- Annual sales declines of 13.1% for the past five years show its products and services struggled to connect with the market
- Low free cash flow margin of 6.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $14.69 per share, Smith & Wesson trades at 31.2x forward P/E. To fully understand why you should be careful with SWBI, check out our full research report (it’s free).
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