Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks were flat over the past six months while the S&P 500 gained 11.7%.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks we’re passing on.
Under Armour (UAA)
Market Cap: $2.21 billion
Founded in 1996 by a former University of Maryland football player, Under Armour (NYSE:UAA) is an apparel brand specializing in sportswear designed to improve athletic performance.
Why Do We Think UAA Will Underperform?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Under Armour is trading at $5.20 per share, or 67.8x forward P/E. Read our free research report to see why you should think twice about including UAA in your portfolio.
Carnival (CCL)
Market Cap: $32.16 billion
Boasting outrageous amenities like a planetarium on board its ships, Carnival (NYSE:CCL) is one of the world's largest leisure travel companies and a prominent player in the cruise industry.
Why Do We Pass on CCL?
- Performance surrounding its passenger cruise days has lagged its peers
- Free cash flow margin is not anticipated to grow over the next year
- ROIC of 1.4% reflects management’s challenges in identifying attractive investment opportunities
At $23.47 per share, Carnival trades at 10.2x forward P/E. To fully understand why you should be careful with CCL, check out our full research report (it’s free).
Planet Fitness (PLNT)
Market Cap: $3.87 billion
Founded by two brothers who purchased a struggling gym, Planet Fitness (NYSE:PLNT) is a gym franchise that caters to casual fitness users by providing a friendly and inclusive atmosphere.
Why Are We Out on PLNT?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Projected 2.6 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
- Returns on capital are growing as management invests in more worthwhile ventures
Planet Fitness’s stock price of $51.52 implies a valuation ratio of 15x forward P/E. Dive into our free research report to see why there are better opportunities than PLNT.
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