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 returns were flat while the S&P 500 climbed by 4.7%.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. With that said, here are three consumer stocks we’re steering clear of.
Stitch Fix (SFIX)
Market cap: $366.1 million
One of the original subscription box companies, Stitch Fix (NASDAQ: SFIX) is an online personal styling and fashion service that curates personalized clothing selections for customers.
Why Are We Out on SFIX?
- Number of active clients has disappointed over the past two years, indicating weak demand for its offerings
- Earnings per share lagged its peers over the last five years as they only grew by 11.5% annually
- Free cash flow margin is expected to remain in place over the coming year
Stitch Fix’s stock price of $2.75 implies a valuation ratio of 7.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SFIX doesn’t pass our bar.
Churchill Downs (CHDN)
Market cap: $6.69 billion
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ: CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
Why Do We Steer Clear of CHDN?
- Sales trends were unexciting over the last five years as its 14.7% annual growth was below the typical consumer discretionary company
- Low returns on capital reflect management’s struggle to allocate funds effectively
- Returns on capital are increasing as management makes relatively better investment decisions
At $97.62 per share, Churchill Downs trades at 13.5x forward P/E. Read our free research report to see why you should think twice about including CHDN in your portfolio.
Frontier (ULCC)
Market cap: $1.49 billion
Recognizable for the colorful animals adorning each aircraft tail, Frontier Group Holdings (NASDAQ: ULCC) is an ultra low-cost airline that provides budget-friendly flights throughout the United States and select international destinations in the Americas.
Why Is ULCC Risky?
- Annual revenue growth of 13.2% over the last two years was below our standards for the consumer discretionary sector
- Negative free cash flow raises questions about the return timeline for its investments
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Frontier is trading at $6.44 per share, or 316.8x forward P/E. If you’re considering ULCC for your portfolio, see our FREE research report to learn more.
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