Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3% return has lagged the S&P 500 by 5.9 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks we’re swiping left on.
Strategic Education (STRA)
Market Cap: $1.79 billion
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ: STRA) is a career-focused higher education provider.
Why Are We Out on STRA?
- Number of international students has disappointed over the past two years, indicating weak demand for its offerings
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
- Projected 2 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Strategic Education’s stock price of $83.92 implies a valuation ratio of 11x forward P/E. If you’re considering STRA for your portfolio, see our FREE research report to learn more.
Choice Hotels (CHH)
Market Cap: $4.84 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Is CHH Risky?
- Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
- 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 $110.88 per share, Choice Hotels trades at 14.8x forward P/E. Dive into our free research report to see why there are better opportunities than CHH.
Howard Hughes Holdings (HHH)
Market Cap: $3.94 billion
Named after the eccentric business magnate and aviator whose legacy lives on in real estate development, Howard Hughes Holdings (NYSE: HHH) develops, owns, and manages master-planned communities and commercial properties across the United States.
Why Should You Dump HHH?
- Sales trends were unexciting over the last five years as its 16.2% annual growth was below the typical consumer discretionary company
- Returns on capital are increasing as management makes relatively better investment decisions
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Howard Hughes Holdings is trading at $71.61 per share, or 2.9x trailing 12-month price-to-sales. Check out our free in-depth research report to learn more about why HHH doesn’t pass our bar.
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