Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 4.4% over the past six months. This drop was discouraging since the S&P 500 returned 4.1%.

A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks we’re passing on.

iHeartMedia (IHRT)

Market Cap: $264.8 million

Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ: IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.

Why Do We Avoid IHRT?

1. Flat sales over the last two years suggest it must innovate and find new ways to grow
2. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

iHeartMedia’s stock price of $1.93 implies a valuation ratio of 0.4x forward EV-to-EBITDA. To fully understand why you should be careful with IHRT, check out our full research report (it’s free).

Topgolf Callaway (MODG)

Market Cap: $1.70 billion

Formed between the merger of Callaway and Topgolf, Topgolf Callaway (NYSE: MODG) sells golf equipment and operates technology-driven golf entertainment venues.

Why Do We Steer Clear of MODG?

1. Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 22.6% annually
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Topgolf Callaway is trading at $9.23 per share, or 3.6x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why MODG doesn’t pass our bar.

RE/MAX (RMAX)

Market Cap: $161.7 million

Short for Real Estate Maximums, RE/MAX (NYSE: RMAX) operates a real estate franchise network spanning over 100 countries and territories.

Why Do We Think RMAX Will Underperform?

1. Demand for its offerings was relatively low as its number of agents has underwhelmed
2. Earnings per share fell by 8.9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Underwhelming 0% return on capital reflects management’s difficulties in finding profitable growth opportunities

At $8.39 per share, RE/MAX trades at 6.2x forward P/E. Dive into our free research report to see why there are better opportunities than RMAX.

Stocks We Like More

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