Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 5.5% return over the past six months has trailed the S&P 500 by 6.1 percentage points.
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. Taking that into account, here are three consumer stocks that may face trouble.
Kontoor Brands (KTB)
Market Cap: $3.52 billion
Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE: KTB) is a clothing company known for its high-quality denim products.
Why Are We Out on KTB?
- 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
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 9.5% annually
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Kontoor Brands’s stock price of $65.75 implies a valuation ratio of 11.6x forward P/E. Check out our free in-depth research report to learn more about why KTB doesn’t pass our bar.
Choice Hotels (CHH)
Market Cap: $4.77 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Do We Pass on CHH?
- Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
- Low free cash flow margin of 8.8% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Choice Hotels is trading at $105.64 per share, or 14.4x forward P/E. Read our free research report to see why you should think twice about including CHH in your portfolio.
AMC Entertainment (AMC)
Market Cap: $820.2 million
With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE: AMC) operates movie theaters primarily in the US and Europe.
Why Do We Avoid AMC?
- Sales trends were unexciting over the last two years as its 2.3% annual growth was below the typical consumer discretionary company
- Cash-burning history makes us doubt the long-term viability of its business model
At $1.35 per share, AMC Entertainment trades at 14.1x forward EV-to-EBITDA. If you’re considering AMC for your portfolio, see our FREE research report to learn more.
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