Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 13.5% return has lagged the S&P 500 by 3.4 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks best left ignored.
Levi's (LEVI)
Market Cap: $8.24 billion
Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE:LEVI) is an apparel company renowned for its iconic denim products and classic American style.
Why Do We Think LEVI Will Underperform?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.1%
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Levi’s stock price of $21.10 implies a valuation ratio of 15.1x forward P/E. If you’re considering LEVI for your portfolio, see our FREE research report to learn more.
Marriott (MAR)
Market Cap: $77.95 billion
Founded by J. Willard Marriott in 1927, Marriott International (NASDAQ:MAR) is a global hospitality company with a portfolio of over 7,000 properties and 30 brands, spanning 130+ countries and territories.
Why Does MAR Give Us Pause?
- Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
- Estimated sales growth of 4.8% for the next 12 months is soft and implies weaker demand
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 9% for the last two years
Marriott is trading at $290 per share, or 26.5x forward P/E. Read our free research report to see why you should think twice about including MAR in your portfolio.
Matthews (MATW)
Market Cap: $719.3 million
Originally a death care company, Matthews International (NASDAQ:MATW) is a diversified company offering ceremonial services, brand solutions and industrial technologies.
Why Do We Avoid MATW?
- Products and services aren't resonating with the market as its revenue declined by 6.5% annually over the last two years
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 14.8% annually
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
At $23.36 per share, Matthews trades at 17.4x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than MATW.
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