The performance of consumer discretionary businesses is closely linked to economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 25.9% over the past six months, outpacing S&P 500 by 8.4 percentage points.

Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re passing on.

FOX (FOXA)

Market Cap: $25.05 billion

Founded in 1915, Fox (NASDAQ: FOXA) is a diversified media company, operating prominent cable news, television broadcasting, and digital media platforms.

Why Do We Think FOXA Will Underperform?

1. 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 4.5% for the last two years
2. Estimated sales decline of 2.6% for the next 12 months implies a challenging demand environment
3. Projected 4.5 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

FOX is trading at $59.22 per share, or 13.9x forward P/E. Check out our free in-depth research report to learn more about why FOXA doesn’t pass our bar.

iHeartMedia (IHRT)

Market Cap: $406.6 million

Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ: IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.

Why Should You Dump IHRT?

1. Flat sales over the last two years suggest it must innovate and find new ways to grow
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $2.92 per share, iHeartMedia trades at 0.6x forward EV-to-EBITDA. To fully understand why you should be careful with IHRT, check out our full research report (it’s free).

Leggett & Platt (LEG)

Market Cap: $1.26 billion

Founded in 1883, Leggett & Platt (NYSE: LEG) is a diversified manufacturer of products and components for various industries.

Why Do We Steer Clear of LEG?

1. Sales stagnated over the last five years and signal the need for new growth strategies
2. Sales over the last five years were less profitable as its earnings per share fell by 11.8% annually while its revenue was flat
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Leggett & Platt’s stock price of $9.35 implies a valuation ratio of 8x forward P/E. If you’re considering LEG for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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