The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can cause the industry to underperform when macro uncertainty enters the fray, and over the past six months, its 1.5% return has fallen short of the S&P 500’s 12.1% gain.
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 we would avoid.
The New York Times (NYT)
Market Cap: $10.85 billion
Founded in 1851, The New York Times (NYSE: NYT) is an American media organization known for its influential newspaper and expansive digital journalism platforms.
Why Should You Sell NYT?
- Number of subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Projected 3.7 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- ROIC of 16.2% reflects management’s challenges in identifying attractive investment opportunities
The New York Times’s stock price of $67.38 implies a valuation ratio of 23.1x forward P/E. Check out our free in-depth research report to learn more about why NYT doesn’t pass our bar.
Deckers (DECK)
Market Cap: $11.86 billion
Established in 1973, Deckers (NYSE: DECK) is a footwear and apparel conglomerate with a portfolio of lifestyle and performance brands.
Why Are We Out on DECK?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Deckers is trading at $87.95 per share, or 11.5x forward P/E. Read our free research report to see why you should think twice about including DECK in your portfolio.
Lovesac (LOVE)
Market Cap: $228.3 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Is LOVE Risky?
- Sales trends were unexciting over the last five years as its 14.8% annual growth was below the typical consumer discretionary company
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.3% for the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $15.61 per share, Lovesac trades at 9.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than LOVE.
Stocks We Like More
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