Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3.8% return has lagged the S&P 500 by 9.4 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks that may face trouble.
Stitch Fix (SFIX)
Market Cap: $393.6 million
One of the original subscription box companies, Stitch Fix (NASDAQ:SFIX) is an online personal styling and fashion service that curates personalized clothing selections for customers.
Why Do We Pass on SFIX?
- Sluggish trends in its active clients suggest customers aren’t adopting its solutions as quickly as the company hoped
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $2.94 per share, Stitch Fix trades at 5x forward EV-to-EBITDA. If you’re considering SFIX for your portfolio, see our FREE research report to learn more.
MGM Resorts (MGM)
Market Cap: $10.04 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 Should You Sell MGM?
- Annual sales growth of 2% over the last two years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 12× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
MGM Resorts’s stock price of $39.94 implies a valuation ratio of 23x forward P/E. Dive into our free research report to see why there are better opportunities than MGM.
Harley-Davidson (HOG)
Market Cap: $2.90 billion
Founded in 1903, Harley-Davidson (NYSE:HOG) is an American motorcycle manufacturer known for its heavyweight motorcycles designed for cruising on highways.
Why Do We Think HOG Will Underperform?
- Performance surrounding its motorcycles sold has lagged its peers
- Poor free cash flow margin of 7.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Harley-Davidson is trading at $27.84 per share, or 18.9x forward P/E. Read our free research report to see why you should think twice about including HOG in your portfolio.
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