The performance of consumer discretionary businesses is closely linked to economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 11.6% over the past six months, similar to the S&P 500.
Although these companies have produced results lately, investors must be mindful because many are fads and only a few will stand the test of time. With that said, here are three consumer stocks best left ignored.
TEGNA (TGNA)
Market Cap: $3.21 billion
Spun out of Gannett in 2015, TEGNA (NYSE: TGNA) is a media company operating a network of television stations and digital platforms, focusing on local news and community content.
Why Should You Dump TGNA?
- Annual sales declines of 3.7% for the past two years show its products and services struggled to connect with the market
- Sales are projected to tank by 1.4% over the next 12 months as its demand continues evaporating
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
TEGNA is trading at $19.93 per share, or 8.9x forward P/E. To fully understand why you should be careful with TGNA, check out our full research report (it’s free for active Edge members).
Disney (DIS)
Market Cap: $188.9 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 Think Twice About DIS?
- Annual sales growth of 3.1% over the last two years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 1.5 percentage points over the next year
- ROIC of 6.9% reflects management’s challenges in identifying attractive investment opportunities
At $106.75 per share, Disney trades at 16.6x forward P/E. Check out our free in-depth research report to learn more about why DIS doesn’t pass our bar.
Soho House (SHCO)
Market Cap: $1.72 billion
Boasting fancy locations in hubs such as NYC and Miami, Soho House (NYSE: SHCO) is a global hospitality brand offering exclusive private member clubs, hotels, and restaurants.
Why Are We Wary of SHCO?
- Demand for its offerings was relatively low as its number of members has underwhelmed
- Cash burn makes us question whether it can achieve sustainable long-term growth
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Soho House’s stock price of $8.83 implies a valuation ratio of 14.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SHCO in your portfolio.
Stocks We Like More
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