Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 1.9% return has lagged the S&P 500 by 7.4 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re steering clear of.
Gray Television (GTN)
Market Cap: $410.1 million
Specializing in local media coverage, Gray Television (NYSE: GTN) is a broadcast company supplying digital media to various markets in the United States.
Why Is GTN Risky?
- Sales trends were unexciting over the last five years as its 5.2% annual growth was below the typical consumer discretionary company
- ROIC hasn’t moved, making investors question whether its recent investments can increase profitability
At $3.90 per share, Gray Television trades at 5.8x forward EV-to-EBITDA. To fully understand why you should be careful with GTN, check out our full research report (it’s free).
Warner Music Group (WMG)
Market Cap: $15 billion
Launching the careers of legendary artists like Frank Sinatra, Warner Music Group (NASDAQ: WMG) is a music company managing a diverse portfolio of artists, recordings, and music publishing services worldwide.
Why Should You Sell WMG?
- 8.6% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Free cash flow margin is not anticipated to grow over the next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Warner Music Group is trading at $28.75 per share, or 17.3x forward P/E. If you’re considering WMG for your portfolio, see our FREE research report to learn more.
Sysco (SYY)
Market Cap: $39.91 billion
Powering more than 730,000 commercial kitchens across North America and Europe, Sysco (NYSE: SYY) is a global food distributor that supplies restaurants, healthcare facilities, schools, hotels, and other foodservice establishments with food products and related services.
Why Do We Pass on SYY?
- Average unit sales growth of 1.1% over the past two years reflects steady demand for its products
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Sysco’s stock price of $82.65 implies a valuation ratio of 17.6x forward P/E. Dive into our free research report to see why there are better opportunities than SYY.
Stocks We Like More
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