Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 3.1% return over the past six months has trailed 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. Taking that into account, here are three consumer stocks best left ignored.
Norwegian Cruise Line (NCLH)
Market Cap: $7.37 billion
With amenities like a full go-kart race track built into its ships, Norwegian Cruise Line (NYSE: NCLH) is a premier global cruise company.
Why Do We Avoid NCLH?
- Sluggish trends in its passenger cruise days suggest customers aren’t adopting its solutions as quickly as the company hoped
- Negative free cash flow raises questions about the return timeline for its investments
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $16.11 per share, Norwegian Cruise Line trades at 10.5x forward P/E. Dive into our free research report to see why there are better opportunities than NCLH.
Latham (SWIM)
Market Cap: $563.6 million
Started as a family business, Latham (NASDAQ: SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.
Why Should You Sell SWIM?
- Annual revenue growth of 2% over the last five years was below our standards for the consumer discretionary sector
- Poor expense management has led to an operating margin of 4.2% that is below the industry average
- Free cash flow margin is on track to jump by 1.5 percentage points next year, meaning the company will have more resources to pursue growth initiatives, repurchase shares, or pay dividends
Latham is trading at $4.79 per share, or 22.5x forward P/E. If you’re considering SWIM for your portfolio, see our FREE research report to learn more.
Offerpad (OPAD)
Market Cap: $29.25 million
Known for giving homeowners cash offers within 24 hours, Offerpad (NYSE: OPAD) operates a tech-enabled platform specializing in direct home buying and selling solutions.
Why Do We Steer Clear of OPAD?
- Demand for its offerings was relatively low as its number of homes sold has underwhelmed
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
Offerpad’s stock price of $0.64 implies a valuation ratio of 0.1x forward price-to-sales. Read our free research report to see why you should think twice about including OPAD in your portfolio.
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