The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3.1% return has lagged the S&P 500 by 8.2 percentage points.
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 that may face trouble.
PVH (PVH)
Market Cap: $3.90 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 Do We Steer Clear of PVH?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
PVH’s stock price of $84.68 implies a valuation ratio of 6.5x forward P/E. Check out our free in-depth research report to learn more about why PVH doesn’t pass our bar.
Gray Television (GTN)
Market Cap: $431.5 million
Specializing in local media coverage, Gray Television (NYSE: GTN) is a broadcast company supplying digital media to various markets in the United States.
Why Are We Out on GTN?
- Annual revenue growth of 5.2% over the last five years was below our standards for the consumer discretionary sector
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
- 9× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $3.97 per share, Gray Television trades at 0.1x forward price-to-sales. If you’re considering GTN for your portfolio, see our FREE research report to learn more.
Performance Food Group (PFGC)
Market Cap: $14.87 billion
With a massive network spanning 155 distribution centers and delivering over 250,000 different food products, Performance Food Group (NYSE: PFGC) distributes food and food-related products to over 300,000 restaurants, convenience stores, theaters, and institutions across North America.
Why Should You Dump PFGC?
- Products are reaching more customers as its unit sales averaged 6.6% growth over the past two years
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Improving returns on capital suggest management is identifying more profitable investments
Performance Food Group is trading at $94.64 per share, or 17.9x forward P/E. Read our free research report to see why you should think twice about including PFGC in your portfolio.
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