Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 3.7% return was close to the S&P 500’s.
Although these companies have produced results lately, investors must be mindful because many are fads and only a few will stand the test of time. Keeping that in mind, here are three consumer stocks we would avoid.
Tapestry (TPR)
Market Cap: $30.83 billion
Originally founded as Coach, Tapestry (NYSE:TPR) is an American fashion conglomerate with a portfolio of luxury brands offering high-quality accessories and fashion products.
Why Do We Steer Clear of TPR?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Poor expense management has led to an operating margin of 14.4% that is below the industry average
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $151.82 per share, Tapestry trades at 19.6x forward P/E. To fully understand why you should be careful with TPR, check out our full research report (it’s free).
FOX (FOXA)
Market Cap: $23.27 billion
Founded in 1915, Fox (NASDAQ:FOXA) is a diversified media company, operating prominent cable news, television broadcasting, and digital media platforms.
Why Are We Out on FOXA?
- The company has faced growth challenges as its 5.4% annual revenue increases over the last five years fell short of other consumer discretionary companies
- Free cash flow margin is forecasted to shrink by 6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Rising returns on capital show management is making relatively better investments
FOX’s stock price of $58.23 implies a valuation ratio of 10.4x forward P/E. Check out our free in-depth research report to learn more about why FOXA doesn’t pass our bar.
Service International (SCI)
Market Cap: $11.65 billion
Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.
Why Should You Sell SCI?
- Demand for its offerings was relatively low as its number of funeral services performed has underwhelmed
- Low free cash flow margin of 14.7% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Service International is trading at $85.34 per share, or 19.7x forward P/E. If you’re considering SCI for your portfolio, see our FREE research report to learn more.
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