Most consumer discretionary businesses succeed or fail based on the broader economy. Lately, it seems like demand trends have worked in their favor as the industry has returned 21.3% over the past six months, similar to the S&P 500.
Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks we’re passing on.
Figs (FIGS)
Market Cap: $1.22 billion
Rising to fame via TikTok and founded in 2013 by Heather Hasson and Trina Spear, Figs (NYSE: FIGS) is a healthcare apparel company known for its stylish approach to medical attire and uniforms.
Why Should You Dump FIGS?
- Sluggish trends in its active customers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.7 percentage points
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Figs is trading at $7.41 per share, or 133.8x forward P/E. To fully understand why you should be careful with FIGS, check out our full research report (it’s free for active Edge members).
AMC Networks (AMCX)
Market Cap: $328.8 million
Originally the joint-venture of four cable television companies, AMC Networks (NASDAQ: AMCX) is a broadcaster producing a diverse range of television shows and movies.
Why Do We Pass on AMCX?
- Annual sales declines of 4% for the past five years show its products and services struggled to connect with the market
- Sales were less profitable over the last five years as its earnings per share fell by 18.9% annually, worse than its revenue declines
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
AMC Networks’s stock price of $7.71 implies a valuation ratio of 3.3x forward P/E. If you’re considering AMCX for your portfolio, see our FREE research report to learn more.
Cushman & Wakefield (CWK)
Market Cap: $3.64 billion
With expertise in the commercial real estate sector, Cushman & Wakefield (NYSE: CWK) is a global Chicago-based real estate firm offering a comprehensive range of services to clients.
Why Is CWK Risky?
- Annual sales growth of 2.1% over the last two years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Low free cash flow margin of 2.2% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $15.70 per share, Cushman & Wakefield trades at 11.6x forward P/E. Dive into our free research report to see why there are better opportunities than CWK.
Stocks We Like More
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