The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 6.8% return was close to the S&P 500’s.
Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. Keeping that in mind, here are three consumer stocks that may face trouble.
Polaris (PII)
Market Cap: $3.95 billion
Founded in 1954, Polaris (NYSE: PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Why Should You Sell PII?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 3.2 percentage points
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $71.06 per share, Polaris trades at 54.6x forward P/E. Read our free research report to see why you should think twice about including PII in your portfolio.
Brunswick (BC)
Market Cap: $5.30 billion
Formerly known as Brunswick-Balke-Collender Company, Brunswick (NYSE: BC) is a designer and manufacturer of recreational marine products, including boats, engines, and marine parts.
Why Should You Dump BC?
- Muted 2.8% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Free cash flow margin is projected to show no improvement next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Brunswick’s stock price of $85.72 implies a valuation ratio of 19.5x forward P/E. Check out our free in-depth research report to learn more about why BC doesn’t pass our bar.
CBRE (CBRE)
Market Cap: $38.63 billion
Established in 1906, CBRE (NYSE: CBRE) is one of the largest commercial real estate services firms in the world.
Why Do We Avoid CBRE?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 12% over the last five years was below our standards for the consumer discretionary sector
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
CBRE is trading at $136.51 per share, or 18x forward P/E. Dive into our free research report to see why there are better opportunities than CBRE.
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