The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3.9% return has lagged the S&P 500 by 17.2 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks we’re passing on.
Polaris (PII)
Market Cap: $2.99 billion
Founded in 1954, Polaris (NYSE:PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Why Are We Out on PII?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Poor free cash flow margin of 3.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Polaris is trading at $52.67 per share, or 18.6x forward P/E. If you’re considering PII for your portfolio, see our FREE research report to learn more.
Matthews (MATW)
Market Cap: $606.5 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?
- Annual sales declines of 7.4% for the past five years show its products and services struggled to connect with the market
- Negative free cash flow raises questions about the return timeline for its investments
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $19.44 per share, Matthews trades at 24.8x forward P/E. Check out our free in-depth research report to learn more about why MATW doesn’t pass our bar.
Verizon (VZ)
Market Cap: $191 billion
Formed in 1984 as Bell Atlantic after the breakup of Bell System into seven companies, Verizon (NYSE:VZ) is a telecom giant providing a range of communications and internet services.
Why Should You Sell VZ?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Free cash flow margin is expected to increase by 1.3 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Verizon’s stock price of $46.10 implies a valuation ratio of 9.2x forward P/E. Dive into our free research report to see why there are better opportunities than VZ.
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