The performance of consumer discretionary businesses is closely linked to economic cycles. This volatility leads to big swings in stock prices that have worked in their favor recently - over the past six months, the industry has returned 23% and beat the S&P 500 by 4.2 percentage points.
Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks that may face trouble.
Columbia Sportswear (COLM)
Market Cap: $2.86 billion
Originally founded as a hat store in 1938, Columbia Sportswear (NASDAQ: COLM) is a manufacturer of outerwear, sportswear, and footwear designed for outdoor enthusiasts.
Why Do We Think COLM Will Underperform?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Eroding returns on capital suggest its historical profit centers are aging
Columbia Sportswear is trading at $52.30 per share, or 16.3x forward P/E. If you’re considering COLM for your portfolio, see our FREE research report to learn more.
Laureate Education (LAUR)
Market Cap: $4.65 billion
Founded in 1998 by Douglas L. Becker and based in Miami, Laureate Education (NASDAQ: LAUR) is a global network of higher education institutions.
Why Does LAUR Fall Short?
- Number of enrolled students has disappointed over the past two years, indicating weak demand for its offerings
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 9.3% annually while its revenue grew
- Low returns on capital reflect management’s struggle to allocate funds effectively
Laureate Education’s stock price of $31.54 implies a valuation ratio of 18.3x forward P/E. Read our free research report to see why you should think twice about including LAUR in your portfolio.
Offerpad (OPAD)
Market Cap: $127.5 million
Known for giving homeowners cash offers within 24 hours, Offerpad (NYSE: OPAD) operates a tech-enabled platform specializing in direct home buying and selling solutions.
Why Do We Steer Clear of OPAD?
- Sluggish trends in its homes purchased suggest customers aren’t adopting its solutions as quickly as the company hoped
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
At $4.16 per share, Offerpad trades at 0.2x forward price-to-sales. To fully understand why you should be careful with OPAD, check out our full research report (it’s free).
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