Most consumer discretionary businesses succeed or fail based on the broader economy. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 10.7%. This drop was worse than the S&P 500’s 5.2% fall.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks that may face trouble.
Disney (DIS)
Market Cap: $176.9 billion
Founded by brothers Walt and Roy, Disney (NYSE: DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.
Why Do We Steer Clear of DIS?
- Scale is a double-edged sword because it limits the company's growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4.2% for the last five years
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 2.6 percentage points over the next year
- Low returns on capital reflect management’s struggle to allocate funds effectively
Disney’s stock price of $89.10 implies a valuation ratio of 17.6x forward price-to-earnings. Check out our free in-depth research report to learn more about why DIS doesn’t pass our bar.
MGM Resorts (MGM)
Market Cap: $8.78 billion
Operating several properties on the Las Vegas Strip, MGM Resorts (NYSE: MGM) is a global hospitality and entertainment company known for its resorts and casinos.
Why Do We Pass on MGM?
- Sizable revenue base leads to growth challenges as its 6% annual revenue increases over the last five years fell short of other consumer discretionary companies
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- 12× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $28.10 per share, MGM Resorts trades at 13.7x forward price-to-earnings. If you’re considering MGM for your portfolio, see our FREE research report to learn more.
ADT (ADT)
Market Cap: $7.29 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 Is ADT Risky?
- Sluggish trends in its customers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
ADT is trading at $8.05 per share, or 10.4x forward price-to-earnings. Read our free research report to see why you should think twice about including ADT in your portfolio.
Stocks We Like More
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