Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand trends may be working against them as the industry’s returns were flat while the S&P 500 was up 11%.
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.
Tapestry (TPR)
Market Cap: $28.21 billion
Originally founded as Coach, Tapestry (NYSE: TPR) is an American fashion conglomerate with a portfolio of luxury brands offering high-quality accessories and fashion products.
Why Should You Sell TPR?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Poor expense management has led to an operating margin of 14.4% that is below the industry average
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Tapestry’s stock price of $139.66 implies a valuation ratio of 18.3x forward P/E. If you’re considering TPR for your portfolio, see our FREE research report to learn more.
Bally's (BALY)
Market Cap: $644.2 million
Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE: BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.
Why Do We Pass on BALY?
- Annual revenue growth of 6.9% over the last two years was below our standards for the consumer discretionary sector
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $13.16 per share, Bally's trades at 11.4x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than BALY.
Purple (PRPL)
Market Cap: $43.13 million
Founded by two brothers, Purple (NASDAQ: PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Should You Dump PRPL?
- Products and services have few die-hard fans as sales have declined by 8.4% annually over the last five years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Purple is trading at $0.39 per share, or 0.1x forward price-to-sales. To fully understand why you should be careful with PRPL, check out our full research report (it’s free).
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