Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand trends may be working against their favor as the industry’s returns were flat while the S&P 500 was up 7.3%.
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. On that note, here are three consumer stocks we’re swiping left on.
Pool (POOL)
Market Cap: $10.04 billion
Founded in 1993 and headquartered in Louisiana, Pool (NASDAQ:POOL) is one of the largest wholesale distributors of swimming pool supplies, equipment, and related leisure products.
Why Do We Think POOL Will Underperform?
- Annual revenue growth of 7.5% over the last five years was below our standards for the consumer discretionary sector
- Free cash flow margin is expected to increase by 1.3 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $269.57 per share, Pool trades at 23.7x forward P/E. Dive into our free research report to see why there are better opportunities than POOL.
Norwegian Cruise Line (NCLH)
Market Cap: $10.58 billion
With amenities like a full go-kart race track built into its ships, Norwegian Cruise Line (NYSE:NCLH) is a premier global cruise company.
Why Should You Sell NCLH?
- Performance surrounding its passenger cruise days has lagged its peers
- Negative free cash flow raises questions about the return timeline for its investments
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Norwegian Cruise Line’s stock price of $23.30 implies a valuation ratio of 9.1x forward P/E. To fully understand why you should be careful with NCLH, check out our full research report (it’s free).
Wyndham (WH)
Market Cap: $5.87 billion
Established in 1981, Wyndham (NYSE:WH) is a global hotel franchising company with over 9,000 hotels across nearly 95 countries on six continents.
Why Is WH Risky?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Wyndham is trading at $77.63 per share, or 17x forward P/E. If you’re considering WH for your portfolio, see our FREE research report to learn more.
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