Consumer discretionary businesses are levered to the highs and lows of economic cycles. 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 7.5%.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks we’re swiping left on.
Movado (MOV)
Market Cap: $820.9 million
With its watches displayed in 20 museums around the world, Movado (NYSE: MOV) is a watchmaking company with a portfolio of watch brands and accessories.
Why Should You Dump MOV?
- Lackluster 3.6% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Low free cash flow margin of 5.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Movado’s stock price of $36.93 implies a valuation ratio of 11.9x forward EV-to-EBITDA. If you’re considering MOV for your portfolio, see our FREE research report to learn more.
Somnigroup (SGI)
Market Cap: $14.93 billion
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Do We Think SGI Will Underperform?
- Muted 14.5% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Free cash flow margin is not anticipated to grow over the next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Somnigroup is trading at $70.99 per share, or 20.6x forward P/E. Check out our free in-depth research report to learn more about why SGI doesn’t pass our bar.
Sabre (SABR)
Market Cap: $656.2 million
Originally a division of American Airlines, Sabre (NASDAQ: SABR) is a technology provider for the global travel and tourism industry.
Why Should You Dump SABR?
- Number of total bookings has disappointed over the past two years, indicating weak demand for its offerings
- Cash burn makes us question whether it can achieve sustainable long-term growth
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $1.70 per share, Sabre trades at 6.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SABR in your portfolio.
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