Consumer discretionary businesses are levered to the highs and lows of 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 2.6% return has fallen short of the S&P 500’s 4.2% gain.
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 steering clear of.
Monarch (MCRI)
Market cap: $2.00 billion
Established in 1993, Monarch (NASDAQ: MCRI) operates luxury casinos and resorts, offering high-end gaming, dining, and hospitality experiences.
Why Do We Avoid MCRI?
- Muted 10.5% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Earnings per share lagged its peers over the last five years as they only grew by 15.4% annually
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Monarch’s stock price of $113.54 implies a valuation ratio of 9x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than MCRI.
Wolverine Worldwide (WWW)
Market cap: $1.93 billion
Founded in 1883, Wolverine Worldwide (NYSE: WWW) is a global footwear company with a diverse portfolio of brands including Merrell, Hush Puppies, and Saucony.
Why Do We Pass on WWW?
- Products and services aren’t resonating with the market as its revenue declined by 1.9% annually over the last five years
- Earnings per share have contracted by 2.2% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 8% for the last two years
At $23.50 per share, Wolverine Worldwide trades at 12.2x forward P/E. Read our free research report to see why you should think twice about including WWW in your portfolio.
Flutter Entertainment (FLUT)
Market cap: $14.22 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?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 17.6% for the last five years
- Free cash flow margin is expected to remain in place over the coming year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Flutter Entertainment is trading at $81.96 per share, or 13.2x forward P/E. Check out our free in-depth research report to learn more about why FLUT doesn’t pass our bar.
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