Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 9.8% over the past six months. This performance is a far cry from the S&P 500’s 2.3% ascent.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks best left ignored.
Sonos (SONO)
Market Cap: $1.66 billion
A pioneer in connected home audio systems, Sonos (NASDAQ: SONO) offers a range of premium wireless speakers and sound systems.
Why Are We Out on SONO?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Poor free cash flow margin of 4.5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Sonos’s stock price of $13.77 implies a valuation ratio of 1.2x forward price-to-sales. Check out our free in-depth research report to learn more about why SONO doesn’t pass our bar.
Universal Technical Institute (UTI)
Market Cap: $1.94 billion
Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.
Why Do We Steer Clear of UTI?
- Sluggish trends in its new students suggest customers aren’t adopting its solutions as quickly as the company hoped
- Free cash flow margin is forecasted to shrink by 1.5 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Universal Technical Institute is trading at $35.20 per share, or 17.6x forward EV-to-EBITDA. If you’re considering UTI for your portfolio, see our FREE research report to learn more.
American Airlines (AAL)
Market Cap: $6.97 billion
One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ: AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.
Why Is AAL Risky?
- Sluggish trends in its revenue passenger miles suggest customers aren’t adopting its solutions as quickly as the company hoped
- Returns on capital are growing as management invests in more worthwhile ventures
- High net-debt-to-EBITDA ratio of 9× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $10.58 per share, American Airlines trades at 5.4x forward P/E. Read our free research report to see why you should think twice about including AAL in your portfolio.
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