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 3.4% return has lagged the S&P 500 by 6.9 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks we’re swiping left on.
Charter (CHTR)
Market Cap: $18.11 billion
Operating as Spectrum, Charter (NASDAQ:CHTR) is a leading telecommunications company offering cable television, high-speed internet, and voice services across the United States.
Why Do We Avoid CHTR?
- Demand for its offerings was relatively low as its number of internet subscribers has underwhelmed
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 7.8% for the last two years
- Stagnant returns on capital show management has failed to improve the company’s business quality
Charter’s stock price of $146.45 implies a valuation ratio of 0.3x forward price-to-sales. Check out our free in-depth research report to learn more about why CHTR doesn’t pass our bar.
Scholastic (SCHL)
Market Cap: $870.7 million
Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ:SCHL) is an international company specializing in children's publishing, education, and media services.
Why Do We Think SCHL Will Underperform?
- Muted 6.4% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Poor free cash flow margin of 13.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $40.91 per share, Scholastic trades at 20.6x forward P/E. To fully understand why you should be careful with SCHL, check out our full research report (it’s free).
Viking (VIK)
Market Cap: $41.2 billion
From a single river cruise offering to a fleet of 96 vessels across multiple continents, Viking (NYSE:VIK) operates a fleet of small luxury cruise ships offering river, ocean, and expedition voyages focused on cultural enrichment and destination immersion.
Why Is VIK Risky?
- Lackluster 17.8% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Subpar operating margin of 21.9% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Low free cash flow margin of 20.9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Viking is trading at $92.75 per share, or 27.8x forward P/E. Read our free research report to see why you should think twice about including VIK in your portfolio.
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