Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand trends may be working against them as the industry’s returns were flat while the S&P 500 was up 11.8%.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Keeping that in mind, here are three consumer stocks we’re passing on.
Zillow (ZG)
Market Cap: $7.57 billion
Founded by Expedia co-founders Lloyd Frink and Rich Barton, Zillow (NASDAQ: ZG) is the leading U.S. online real estate marketplace.
Why Do We Pass on ZG?
- Products and services have few die-hard fans as sales have declined by 6.7% annually over the last five years
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 5.8% annually
- Low free cash flow margin of 11.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Zillow is trading at $34.32 per share, or 14x forward P/E. To fully understand why you should be careful with ZG, check out our full research report (it’s free).
Rush Street Interactive (RSI)
Market Cap: $2.98 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE: RSI) is an operator of digital gaming platforms.
Why Do We Avoid RSI?
- Muted 27.1% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Operating margin of 8.2% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Poor free cash flow margin of 12.2% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Rush Street Interactive’s stock price of $25.76 implies a valuation ratio of 34.3x forward P/E. If you’re considering RSI for your portfolio, see our FREE research report to learn more.
JLL (JLL)
Market Cap: $16.32 billion
Founded in 1999 through the merger of Jones Lang Wootton and LaSalle Partners, JLL (NYSE: JLL) is a company specializing in real estate advisory and investment management services.
Why Are We Bearish on JLL?
- Annual sales growth of 9.6% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.2% for the last two years
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
At $354.72 per share, JLL trades at 13.9x forward P/E. Read our free research report to see why you should think twice about including JLL in your portfolio.
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