The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 1.3%. This drop was discouraging since the S&P 500 returned 5.6%.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks that may face trouble.
The New York Times (NYT)
Market Cap: $9.19 billion
Founded in 1851, The New York Times (NYSE: NYT) is an American media organization known for its influential newspaper and expansive digital journalism platforms.
Why Are We Hesitant About NYT?
- Number of subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 6.5%
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
The New York Times’s stock price of $56.77 implies a valuation ratio of 26.2x forward P/E. Read our free research report to see why you should think twice about including NYT in your portfolio.
VF Corp (VFC)
Market Cap: $4.77 billion
Owner of The North Face, Vans, and Supreme, VF Corp (NYSE: VFC) is a clothing conglomerate specializing in branded lifestyle apparel, footwear, and accessories.
Why Should You Dump VFC?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $12.25 per share, VF Corp trades at 11.9x forward P/E. To fully understand why you should be careful with VFC, check out our full research report (it’s free).
LKQ (LKQ)
Market Cap: $9.80 billion
A global distributor of vehicle parts and accessories, LKQ (NASDAQ: LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.
Why Do We Pass on LKQ?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Estimated sales growth of 2% for the next 12 months implies demand will slow from its two-year trend
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
LKQ is trading at $37.93 per share, or 10.3x forward P/E. Check out our free in-depth research report to learn more about why LKQ doesn’t pass our bar.
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