The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can cause the industry to underperform when macro uncertainty enters the fray, and over the past six months, its 1.6% return has fallen short of the S&P 500’s 12.9% gain.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three consumer stocks best left ignored.
E.W. Scripps (SSP)
Market Cap: $291 million
Founded as a chain of daily newspapers, E.W. Scripps (NASDAQ:SSP) is a diversified media enterprise operating a range of local television stations, national networks, and digital media platforms.
Why Do We Avoid SSP?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 9× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
E.W. Scripps’s stock price of $3.14 implies a valuation ratio of 321x forward P/E. Check out our free in-depth research report to learn more about why SSP doesn’t pass our bar.
Bright Horizons (BFAM)
Market Cap: $3.34 billion
Founded in 1986, Bright Horizons (NYSE:BFAM) is a global provider of child care, early education, and workforce support solutions.
Why Do We Think BFAM Will Underperform?
- Annual revenue growth of 14.4% over the last five years was below our standards for the consumer discretionary sector
- Free cash flow margin is expected to remain in place over the coming year
- Rising returns on capital show management is making relatively better investments
Bright Horizons is trading at $68.72 per share, or 12.5x forward P/E. Read our free research report to see why you should think twice about including BFAM in your portfolio.
Malibu Boats (MBUU)
Market Cap: $459.1 million
Founded in California in 1982, Malibu Boats (NASDAQ:MBUU) is a manufacturer of high-performance sports boats and luxury watercrafts.
Why Are We Bearish on MBUU?
- Products and services fail to spark excitement with consumers, as seen in its flat sales over the last five years
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $23.39 per share, Malibu Boats trades at 9.8x forward P/E. Check out our free in-depth research report to learn more about why MBUU doesn’t pass our bar.
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