Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks were flat over the past six months while the S&P 500 gained 11%.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks we’re passing on.
Carter's (CRI)
Market Cap: $1.43 billion
Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE:CRI) is an American designer and marketer of children's apparel.
Why Do We Avoid CRI?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Low free cash flow margin of 6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Carter’s stock price of $38.75 implies a valuation ratio of 11.8x forward P/E. Read our free research report to see why you should think twice about including CRI in your portfolio.
MGM Resorts (MGM)
Market Cap: $12.36 billion
Operating several properties on the Las Vegas Strip, MGM Resorts (NYSE:MGM) is a global hospitality and entertainment company known for its resorts and casinos.
Why Is MGM Risky?
- The company has faced growth challenges as its 3.1% annual revenue increases over the last two years fell short of other consumer discretionary companies
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
MGM Resorts is trading at $47.94 per share, or 25.5x forward P/E. Check out our free in-depth research report to learn more about why MGM doesn’t pass our bar.
PENN Entertainment (PENN)
Market Cap: $2.50 billion
Established in 1982, PENN Entertainment (NASDAQ:PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.
Why Are We Out on PENN?
- Annual revenue growth of 13.6% 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 -0.9% for the last two years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $19.64 per share, PENN Entertainment trades at 21.4x forward P/E. To fully understand why you should be careful with PENN, check out our full research report (it’s free).
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