The performance of consumer discretionary businesses is closely linked to economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 4.4% return over the past six months has trailed the S&P 500 by 6.4 percentage points.
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. Taking that into account, here are three consumer stocks we’re passing on.
Sirius XM (SIRI)
Market Cap: $9.76 billion
Known for its commercial-free music channels, Sirius XM (NASDAQ: SIRI) is a broadcasting company that provides satellite radio and online radio services across North America.
Why Is SIRI Risky?
- Lackluster 1% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $29.02 per share, Sirius XM trades at 8.7x forward P/E. If you’re considering SIRI for your portfolio, see our FREE research report to learn more.
Crocs (CROX)
Market Cap: $5.41 billion
Founded in 2002, Crocs (NASDAQ: CROX) sells casual footwear and is known for its iconic clog shoe.
Why Do We Think CROX Will Underperform?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Subpar operating margin of 14.1% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Crocs’s stock price of $108.25 implies a valuation ratio of 7.4x forward P/E. Dive into our free research report to see why there are better opportunities than CROX.
Cushman & Wakefield (CWK)
Market Cap: $3.00 billion
With expertise in the commercial real estate sector, Cushman & Wakefield (NYSE: CWK) is a global Chicago-based real estate firm offering a comprehensive range of services to clients.
Why Should You Dump CWK?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6% over the last five years was below our standards for the consumer discretionary sector
- Poor free cash flow margin of 1.7% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
Cushman & Wakefield is trading at $12.82 per share, or 8.7x forward P/E. Read our free research report to see why you should think twice about including CWK in your portfolio.
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