The performance of consumer discretionary businesses is closely linked to economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 21.2% over the past six months, outpacing S&P 500 by 6.8 percentage points.
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 best left ignored.
iHeartMedia (IHRT)
Market Cap: $666.8 million
Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ: IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.
Why Do We Steer Clear of IHRT?
- 4.9% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
iHeartMedia is trading at $4.73 per share, or 1x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why IHRT doesn’t pass our bar.
Scholastic (SCHL)
Market Cap: $728.3 million
Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ: SCHL) is an international company specializing in children's publishing, education, and media services.
Why Do We Think SCHL Will Underperform?
- Annual revenue growth of 1.9% over the last five years was below our standards for the consumer discretionary sector
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.9% for the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $28.99 per share, Scholastic trades at 18.6x forward P/E. Dive into our free research report to see why there are better opportunities than SCHL.
RE/MAX (RMAX)
Market Cap: $170.3 million
Short for Real Estate Maximums, RE/MAX (NYSE: RMAX) operates a real estate franchise network spanning over 100 countries and territories.
Why Do We Avoid RMAX?
- Demand for its offerings was relatively low as its number of agents has underwhelmed
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 7.1% annually
- Projected 8 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
RE/MAX’s stock price of $7.90 implies a valuation ratio of 6.5x forward P/E. If you’re considering RMAX for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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