Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 1.6% return over the past six months has trailed the S&P 500 by 5.6 percentage points.
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. Taking that into account, here are three consumer stocks best left ignored.
Disney (DIS)
Market Cap: $174.2 billion
Founded by brothers Walt and Roy, Disney (NYSE: DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.
Why Do We Pass on DIS?
- Annual sales growth of 10.8% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Low free cash flow margin of 9.4% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Underwhelming 7.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $95.95 per share, Disney trades at 13x forward P/E. If you’re considering DIS for your portfolio, see our FREE research report to learn more.
Lindblad Expeditions (LIND)
Market Cap: $1.52 billion
Founded by explorer Sven-Olof Lindblad in 1979, Lindblad Expeditions (NASDAQ: LIND) offers cruising experiences to remote destinations in partnership with National Geographic.
Why Are We Wary of LIND?
- Sales trends were unexciting over the last two years as its 17.4% annual growth was below the typical consumer discretionary company
- Subpar operating margin of 5.8% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 8.7% for the last two years
Lindblad Expeditions’s stock price of $26.57 implies a valuation ratio of 106.7x forward P/E. Dive into our free research report to see why there are better opportunities than LIND.
US Foods (USFD)
Market Cap: $20.09 billion
With a fleet of over 6,500 trucks delivering everything from fresh produce to frozen entrées, US Foods (NYSE: USFD) is a major foodservice distributor that supplies food products and services to approximately 250,000 restaurants, healthcare facilities, hotels, and educational institutions across the United States.
Why Do We Think USFD Will Underperform?
- Unit sales averaged 2.4% growth over the past two years and imply healthy demand for its products
- Poor expense management has led to an operating margin of 3% that is below the industry average
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
US Foods is trading at $100.60 per share, or 20.4x forward P/E. Read our free research report to see why you should think twice about including USFD in your portfolio.
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