Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 9.9%. This drop was seriously disheartening since the S&P 500 held steady.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re steering clear of.
PVH (PVH)
Market Cap: $2.79 billion
Founded in 1881 by a husband and wife duo, PVH (NYSE: PVH) is a global fashion conglomerate with iconic brands like Calvin Klein and Tommy Hilfiger.
Why Is PVH Risky?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Low free cash flow margin of 6.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
PVH’s stock price of $60.87 implies a valuation ratio of 5.2x forward P/E. If you’re considering PVH for your portfolio, see our FREE research report to learn more.
Malibu Boats (MBUU)
Market Cap: $518.3 million
Founded in California in 1982, Malibu Boats (NASDAQ: MBUU) is a manufacturer of high-performance sports boats and luxury watercrafts.
Why Do We Think MBUU Will Underperform?
- Lackluster 3.9% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $25.75 per share, Malibu Boats trades at 15.2x forward P/E. Check out our free in-depth research report to learn more about why MBUU doesn’t pass our bar.
Latham (SWIM)
Market Cap: $702.9 million
Started as a family business, Latham (NASDAQ: SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.
Why Do We Steer Clear of SWIM?
- 6.2% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Poor expense management has led to an operating margin of 4.6% that is below the industry average
- Free cash flow margin is projected to show no improvement next year
Latham is trading at $6.03 per share, or 32.8x forward P/E. Dive into our free research report to see why there are better opportunities than SWIM.
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