Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3.9% return has lagged the S&P 500 by 9.5 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks we’re swiping left on.
Paramount (PSKY)
Market Cap: $11.07 billion
Owner of Spongebob Squarepants and formerly known as ViacomCBS, Paramount Global (NASDAQ: PSKY) is a major media conglomerate offering television, film production, and digital content across various global platforms.
Why Do We Avoid PSKY?
- The company has faced growth challenges as its 2.1% annual revenue increases over the last five years fell short of other consumer discretionary companies
- Free cash flow margin is forecasted to shrink by 2.3 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
At $9.95 per share, Paramount trades at 12.8x forward P/E. Dive into our free research report to see why there are better opportunities than PSKY.
Compass (COMP)
Market Cap: $5.89 billion
Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass (NYSE: COMP) is a digital-first company operating a residential real estate brokerage in the United States.
Why Is COMP Risky?
- Sluggish trends in its transactions suggest customers aren’t adopting its solutions as quickly as the company hoped
- Historical operating margin losses point to an inefficient cost structure
- Poor free cash flow margin of 0.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Compass’s stock price of $7.91 implies a valuation ratio of 10.8x forward P/E. To fully understand why you should be careful with COMP, check out our full research report (it’s free).
Sphere Entertainment (SPHR)
Market Cap: $4.81 billion
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Do We Think SPHR Will Underperform?
- Sales trends were unexciting over the last five years as its 18.7% annual growth was below the typical consumer discretionary company
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 18.1 percentage points over the next year
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
Sphere Entertainment is trading at $132.96 per share, or 16.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SPHR in your portfolio.
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