Consumer discretionary businesses are levered to the highs and lows of economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 10.4% 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. Taking that into account, here are three consumer stocks we’re steering clear of.
PVH (PVH)
Market Cap: $3.07 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 Avoid PVH?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Low free cash flow margin of 6.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $67.02 per share, PVH trades at 5.7x forward P/E. To fully understand why you should be careful with PVH, check out our full research report (it’s free for active Edge members).
Movado (MOV)
Market Cap: $456.5 million
With its watches displayed in 20 museums around the world, Movado (NYSE: MOV) is a watchmaking company with a portfolio of watch brands and accessories.
Why Do We Steer Clear of MOV?
- Lackluster 4.7% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Movado is trading at $20.62 per share, or 0.7x forward price-to-sales. Read our free research report to see why you should think twice about including MOV in your portfolio.
ADT (ADT)
Market Cap: $6.56 billion
Founded in 1874 and headquartered in Boca Raton, Florida, ADT (NYSE: ADT) is a provider of security, automation, and smart home solutions, offering comprehensive services for home and business protection.
Why Are We Out on ADT?
- Performance surrounding its customers has lagged its peers
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.2 percentage points
- Low returns on capital reflect management’s struggle to allocate funds effectively
ADT’s stock price of $8.07 implies a valuation ratio of 8.8x forward P/E. Dive into our free research report to see why there are better opportunities than ADT.
Stocks We Like More
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