Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 4.5% return over the past six months has trailed the S&P 500 by 7.1 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks best left ignored.
G-III (GIII)
Market Cap: $1.40 billion
Founded as a small leather goods business, G-III (NASDAQ:GIII) is a fashion and apparel conglomerate with a diverse portfolio of brands.
Why Should You Sell GIII?
- Lackluster 6% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Annual earnings per share growth of 3.5% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 8.2% for the last two years
G-III is trading at $33.53 per share, or 13.8x forward P/E. Dive into our free research report to see why there are better opportunities than GIII.
Bally's (BALY)
Market Cap: $479 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 Are We Out on BALY?
- 6.9% annual revenue growth over the last two years was slower than its consumer discretionary peers
- 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 $9.43 per share, Bally's trades at 13.1x forward EV-to-EBITDA. If you’re considering BALY for your portfolio, see our FREE research report to learn more.
Funko (FNKO)
Market Cap: $376.9 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 Avoid FNKO?
- Annual revenue growth of 2% over the last five years was below our standards for the consumer discretionary sector
- Poor free cash flow margin of 0.6% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Returns on capital are growing as management invests in more worthwhile ventures
Funko’s stock price of $6.78 implies a valuation ratio of 40.4x forward P/E. To fully understand why you should be careful with FNKO, check out our full research report (it’s free).
Stocks We Like More
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