Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3% return has lagged the S&P 500 by 6.8 percentage points.
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 that may face trouble.
ThredUp (TDUP)
Market Cap: $601.3 million
Founded to revolutionize thrifting, ThredUp (NASDAQ: TDUP) is a leading online fashion resale marketplace offering a wide selection of gently-used clothing and accessories.
Why Do We Think TDUP Will Underperform?
- Demand for its offerings was relatively low as its number of orders has underwhelmed
- Poor expense management has led to operating margin losses
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.5% for the last two years
At $4.59 per share, ThredUp trades at 24.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TDUP in your portfolio.
Mattel (MAT)
Market Cap: $4.33 billion
Known for the creation of iconic toys such as Barbie and Hotwheels, Mattel (NASDAQ: MAT) is a global children's entertainment company specializing in the design and production of consumer products.
Why Should You Dump MAT?
- Sales trends were unexciting over the last five years as its 2% annual growth was below the typical consumer discretionary company
- Low free cash flow margin of 8.5% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Mattel’s stock price of $15.05 implies a valuation ratio of 11.8x forward P/E. To fully understand why you should be careful with MAT, check out our full research report (it’s free).
Service International (SCI)
Market Cap: $10.62 billion
Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.
Why Should You Sell SCI?
- Sluggish trends in its funeral services performed suggest customers aren’t adopting its solutions as quickly as the company hoped
- Poor free cash flow margin of 14.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Service International is trading at $76.99 per share, or 18.1x forward P/E. If you’re considering SCI for your portfolio, see our FREE research report to learn more.
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