Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 5.6% return over the past six months has trailed the S&P 500 by 2.8 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 we’re steering clear of.
Sonos (SONO)
Market Cap: $1.84 billion
A pioneer in connected home audio systems, Sonos (NASDAQ: SONO) offers a range of premium wireless speakers and sound systems.
Why Do We Steer Clear of SONO?
- Annual revenue declines of 1.4% over the last five years indicate problems with its market positioning
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 9.3% annually, worse than its revenue
- Low free cash flow margin of 6.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Sonos’s stock price of $13.33 implies a valuation ratio of 12.6x forward P/E. Read our free research report to see why you should think twice about including SONO in your portfolio.
Steven Madden (SHOO)
Market Cap: $3.35 billion
As seen in the infamous Wolf of Wall Street movie, Steven Madden (NASDAQ: SHOO) is a fashion brand famous for its trendy and innovative footwear, appealing to a young and style-conscious audience.
Why Are We Out on SHOO?
- 17% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Poor free cash flow margin of 5.1% 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
Steven Madden is trading at $39.92 per share, or 18.4x forward P/E. To fully understand why you should be careful with SHOO, check out our full research report (it’s free).
Carriage Services (CSV)
Market Cap: $629.3 million
Established in 1991, Carriage Services (NYSE: CSV) is a provider of funeral and cemetery services in the United States.
Why Do We Pass on CSV?
- Sales trends were unexciting over the last five years as its 3.6% annual growth was below the typical consumer discretionary company
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 10.4% for the last two years
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
At $38.98 per share, Carriage Services trades at 10.9x forward P/E. Check out our free in-depth research report to learn more about why CSV doesn’t pass our bar.
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