Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 6.7%. This drop was worse than the S&P 500’s 2.3% fall.

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 we’re passing on.

Steven Madden (SHOO)

Market Cap: $2.48 billion

As seen in the infamous Wolf of Wall Street movie, Steven Madden (NASDAQ: SHOO) is a fashion brand famous for its trendy and innovative footwear, appealing to a young and style-conscious audience.

Why Do We Think SHOO Will Underperform?

1. Annual revenue growth of 16.1% over the last five years was below our standards for the consumer discretionary sector
2. Low free cash flow margin of 6.1% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Steven Madden’s stock price of $33.99 implies a valuation ratio of 16.3x forward P/E. Read our free research report to see why you should think twice about including SHOO in your portfolio.

Royal Caribbean (RCL)

Market Cap: $74.01 billion

Established in 1968, Royal Caribbean Cruises (NYSE: RCL) is a global cruise vacation company renowned for its innovative and exciting cruise experiences.

Why Do We Avoid RCL?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 13.6% over the last two years was below our standards for the consumer discretionary sector
2. Poor free cash flow margin of 9.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Royal Caribbean is trading at $274.00 per share, or 15.3x forward P/E. Dive into our free research report to see why there are better opportunities than RCL.

eXp World (EXPI)

Market Cap: $941.3 million

Founded in 2009, eXp World (NASDAQ: EXPI) is a real estate company known for its virtual, cloud-based approach to real estate brokerage.

Why Are We Out on EXPI?

1. Sales trends were unexciting over the last two years as its 5.7% annual growth was below the typical consumer discretionary company
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.1% for the last two years
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $5.94 per share, eXp World trades at 22.7x forward P/E. To fully understand why you should be careful with EXPI, check out our full research report (it’s free).

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