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 1.7% return has lagged the S&P 500 by 8.3 percentage points.
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. Taking that into account, here are three consumer stocks best left ignored.
LKQ (LKQ)
Market Cap: $6.44 billion
A global distributor of vehicle parts and accessories, LKQ (NASDAQ: LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.
Why Do We Pass on LKQ?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Free cash flow margin is expected to increase by 1.2 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
LKQ is trading at $25.35 per share, or 8.3x forward P/E. Dive into our free research report to see why there are better opportunities than LKQ.
Lovesac (LOVE)
Market Cap: $239 million
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Should You Dump LOVE?
- Sales trends were unexciting over the last five years as its 16.8% annual growth was below the typical consumer discretionary company
- Free cash flow margin is forecasted to shrink by 2.5 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Lovesac’s stock price of $16.37 implies a valuation ratio of 8.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including LOVE in your portfolio.
Funko (FNKO)
Market Cap: $295.4 million
Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ: FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.
Why Do We Steer Clear of FNKO?
- Lackluster 5.4% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Low free cash flow margin of 2.4% 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
At $5.47 per share, Funko trades at 208.8x forward P/E. To fully understand why you should be careful with FNKO, check out our full research report (it’s free).
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