3 Consumer Stocks We Steer Clear Of
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 2.3% return has lagged the S&P 500 by 11.3 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 best left ignored.
Wynn Resorts (WYNN)
Market Cap: $9.36 billion
Founded by the former Mirage Resorts CEO, Wynn Resorts (NASDAQ:WYNN) is a global developer and operator of high-end hotels and casinos, known for its luxurious properties and premium guest services.
Why Are We Bearish on WYNN?
- Muted 2.1% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Poor free cash flow margin of 10.7% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Wynn Resorts is trading at $92.41 per share, or 20.6x forward P/E. Check out our free in-depth research report to learn more about why WYNN doesn’t pass our bar.
Steven Madden (SHOO)
Market Cap: $3.16 billion
As seen in the infamous Wolf of Wall Street movie, Steven Madden (NASDAQ:SHOO) is a fashion brand famous for its trendy and innovative footwear, appealing to a young and style-conscious audience.
Why Do We Think SHOO Will Underperform?
- Sales trends were unexciting over the last five years as its 13.4% annual growth was below the typical consumer discretionary company
- 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 $43.25 per share, Steven Madden trades at 18.2x forward P/E. To fully understand why you should be careful with SHOO, check out our full research report (it’s free).
Sysco (SYY)
Market Cap: $38.25 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 Should You Sell SYY?
- Products are reaching more customers as its unit sales averaged 0.9% growth over the past two years
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Sysco’s stock price of $79.62 implies a valuation ratio of 15.8x forward P/E. If you’re considering SYY for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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