Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 6.3% return over the past six months has trailed the S&P 500 by 6.4 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks best left ignored.
PVH (PVH)
Market Cap: $3.51 billion
Founded in 1881 by a husband and wife duo, PVH (NYSE: PVH) is a global fashion conglomerate with iconic brands like Calvin Klein and Tommy Hilfiger.
Why Should You Sell PVH?
- 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
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Returns on capital are growing as management invests in more worthwhile ventures
At $76.41 per share, PVH trades at 6.4x forward P/E. If you’re considering PVH for your portfolio, see our FREE research report to learn more.
Kontoor Brands (KTB)
Market Cap: $4.32 billion
Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE: KTB) is a clothing company known for its high-quality denim products.
Why Are We Out on KTB?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Poor free cash flow margin of 14.6% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Kontoor Brands’s stock price of $78.98 implies a valuation ratio of 13.9x forward P/E. Check out our free in-depth research report to learn more about why KTB doesn’t pass our bar.
Red Rock Resorts (RRR)
Market Cap: $3.54 billion
Founded in 1976, Red Rock Resorts (NASDAQ: RRR) operates a range of casino resorts and entertainment properties, primarily in the Las Vegas metropolitan area.
Why Do We Avoid RRR?
- Lackluster 6.3% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 12.6% for the last two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Red Rock Resorts is trading at $61.09 per share, or 17.3x forward P/E. Read our free research report to see why you should think twice about including RRR in your portfolio.
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