The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 2.2% return has lagged the S&P 500 by 4 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks we’re passing on.
Caleres (CAL)
Market Cap: $395.7 million
The owner of Dr. Scholl's, Caleres (NYSE: CAL) is a footwear company offering a range of styles.
Why Do We Steer Clear of CAL?
- Muted 3.6% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Caleres is trading at $11.78 per share, or 6.6x forward P/E. Dive into our free research report to see why there are better opportunities than CAL.
E.W. Scripps (SSP)
Market Cap: $273.7 million
Founded as a chain of daily newspapers, E.W. Scripps (NASDAQ: SSP) is a diversified media enterprise operating a range of local television stations, national networks, and digital media platforms.
Why Should You Sell SSP?
- Annual revenue growth of 1.6% over the last five years was below our standards for the consumer discretionary sector
- ROIC hasn’t moved, making investors question whether its recent investments can increase profitability
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $2.99 per share, E.W. Scripps trades at 6.1x forward EV-to-EBITDA. If you’re considering SSP for your portfolio, see our FREE research report to learn more.
WeightWatchers (WW)
Market Cap: $133.4 million
Known by many for its old cable television commercials, WeightWatchers (NASDAQ: WW) is a wellness company offering a range of products and services promoting weight loss and healthy habits.
Why Are We Bearish on WW?
- Annual sales declines of 12% for the past five years show its products and services struggled to connect with the market
- 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
WeightWatchers’s stock price of $13.34 implies a valuation ratio of 4.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why WW doesn’t pass our bar.
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