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’ 3.8% return over the past six months has trailed the S&P 500 by 9.4 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks best left ignored.
Levi's (LEVI)
Market Cap: $7.76 billion
Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE:LEVI) is an apparel company renowned for its iconic denim products and classic American style.
Why Do We Avoid LEVI?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 6.4 percentage points over the next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Levi's is trading at $20.14 per share, or 12.5x forward P/E. If you’re considering LEVI for your portfolio, see our FREE research report to learn more.
Hyatt Hotels (H)
Market Cap: $15.37 billion
Founded in 1957, Hyatt Hotels (NYSE:H) is a global hospitality company with a portfolio of 20 premier brands and over 950 properties across 65 countries.
Why Do We Think H Will Underperform?
- Annual revenue growth of 3.3% over the last two years was below our standards for the consumer discretionary sector
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.8% 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
At $163.10 per share, Hyatt Hotels trades at 42.2x forward P/E. Read our free research report to see why you should think twice about including H in your portfolio.
Choice Hotels (CHH)
Market Cap: $4.32 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE:CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Should You Sell CHH?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- 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
Choice Hotels’s stock price of $96.80 implies a valuation ratio of 13.3x forward P/E. Check out our free in-depth research report to learn more about why CHH doesn’t pass our bar.
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