Most consumer discretionary businesses succeed or fail based on the broader economy. Lately, it seems like demand trends have worked in their favor as the industry has returned 15.5% over the past six months, outpacing S&P 500 by 6.6 percentage points.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks we’re passing on.
Polaris (PII)
Market Cap: $2.46 billion
Founded in 1954, Polaris (NYSE:PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Why Do We Think PII Will Underperform?
- Products and services aren’t resonating with the market as its revenue declined by 8.2% annually over the last two years
- Earnings per share fell by 12.4% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Eroding returns on capital suggest its historical profit centers are aging
At $45.08 per share, Polaris trades at 15x forward price-to-earnings. Read our free research report to see why you should think twice about including PII in your portfolio.
Nexstar Media (NXST)
Market Cap: $4.65 billion
Founded in 1996, Nexstar (NASDAQ:NXST) is an American media company operating numerous local television stations and digital media outlets across the country.
Why Are We Hesitant About NXST?
- Annual revenue growth of 2.5% over the last two years was below our standards for the consumer discretionary sector
- Demand will likely fall over the next 12 months as Wall Street expects flat revenue
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
Nexstar Media’s stock price of $153.34 implies a valuation ratio of 7.8x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than NXST.
Gray Television (GTN)
Market Cap: $399.2 million
Specializing in local media coverage, Gray Television (NYSE:GTN) is a broadcast company supplying digital media to various markets in the United States.
Why Do We Think Twice About GTN?
- Muted 2.1% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Estimated sales decline of 1.1% for the next 12 months implies a challenging demand environment
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Gray Television is trading at $4.03 per share, or 2.5x forward price-to-earnings. Check out our free in-depth research report to learn more about why GTN doesn’t pass our bar.
Stocks We Like More
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