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’ 4.8% return over the past six months has trailed the S&P 500 by 3.7 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks that may face trouble.
Genesco (GCO)
Market Cap: $295.6 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Should You Dump GCO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Genesco’s stock price of $27.39 implies a valuation ratio of 15.7x forward P/E. Read our free research report to see why you should think twice about including GCO in your portfolio.
Cushman & Wakefield (CWK)
Market Cap: $3.50 billion
With expertise in the commercial real estate sector, Cushman & Wakefield (NYSE: CWK) is a global Chicago-based real estate firm offering a comprehensive range of services to clients.
Why Do We Think CWK Will Underperform?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 4.1% over the last five years was below our standards for the consumer discretionary sector
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $15.04 per share, Cushman & Wakefield trades at 11.3x forward P/E. Dive into our free research report to see why there are better opportunities than CWK.
RE/MAX (RMAX)
Market Cap: $143.4 million
Short for Real Estate Maximums, RE/MAX (NYSE: RMAX) operates a real estate franchise network spanning over 100 countries and territories.
Why Is RMAX Risky?
- Sluggish trends in its agents suggest customers aren’t adopting its solutions as quickly as the company hoped
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.1% annually while its revenue grew
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 8 percentage points over the next year
RE/MAX is trading at $7.15 per share, or 5.6x forward P/E. To fully understand why you should be careful with RMAX, check out our full research report (it’s free).
Stocks We Like More
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