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 6.2% 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.
PVH (PVH)
Market Cap: $3.96 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 Pass on PVH?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 4 percentage points over the next year
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
At $71.26 per share, PVH trades at 5.7x forward price-to-earnings. If you’re considering PVH for your portfolio, see our FREE research report to learn more.
Cable One (CABO)
Market Cap: $1.43 billion
Founded in 1986, Cable One (NYSE:CABO) provides high-speed internet, cable television, and telephone services, primarily in smaller markets across the United States.
Why Do We Avoid CABO?
- Sluggish trends in its residential data subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Forecasted revenue decline of 2.5% for the upcoming 12 months implies demand will fall even further
- Projected 4 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Cable One is trading at $254.90 per share, or 5.8x forward price-to-earnings. Read our free research report to see why you should think twice about including CABO in your portfolio.
Service International (SCI)
Market Cap: $11.42 billion
Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.
Why Are We Hesitant About SCI?
- Performance surrounding its funeral services performed has lagged its peers
- Estimated sales growth of 2.3% for the next 12 months is soft and implies weaker demand
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Service International’s stock price of $79.21 implies a valuation ratio of 20.1x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than SCI.
Stocks We Like More
The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.
Take advantage of the rebound by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.
