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 7.9%.
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 steering clear of.
Target Hospitality (TH)
Market Cap: $1.63 billion
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.
Why Do We Steer Clear of TH?
- Sluggish trends in its utilized beds suggest customers aren’t adopting its solutions as quickly as the company hoped
- Low free cash flow margin of 9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Target Hospitality’s stock price of $16.32 implies a valuation ratio of 1,004.2x forward P/E. To fully understand why you should be careful with TH, check out our full research report (it’s free).
United Parks & Resorts (PRKS)
Market Cap: $2.08 billion
Parent company of SeaWorld and home of the world-famous Shamu, United Parks & Resorts (NYSE: PRKS) is a theme park chain featuring marine life, live entertainment, roller coasters, and waterparks.
Why Do We Think PRKS Will Underperform?
- Number of visitors has disappointed over the past two years, indicating weak demand for its offerings
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $44.32 per share, United Parks & Resorts trades at 9.7x forward P/E. Dive into our free research report to see why there are better opportunities than PRKS.
Flutter Entertainment (FLUT)
Market Cap: $17.49 billion
With its digital fingerprints on nearly every aspect of global gambling, from the Super Bowl bettor to the online poker aficionado, Flutter Entertainment (NASDAQ: FLUT) operates a portfolio of leading online sports betting and gaming brands including FanDuel, PokerStars, Paddy Power, and Sky Betting & Gaming.
Why Are We Out on FLUT?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 17.8% over the last two years was below our standards for the consumer discretionary sector
- Subpar operating margin of 2.7% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Flutter Entertainment is trading at $99.95 per share, or 15.3x forward P/E. If you’re considering FLUT for your portfolio, see our FREE research report to learn more.
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