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’ 5% return over the past six months has trailed the S&P 500 by 6.6 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks we’re swiping left on.
Wyndham (WH)
Market Cap: $5.85 billion
Established in 1981, Wyndham (NYSE: WH) is a global hotel franchising company with over 9,000 hotels across nearly 95 countries on six continents.
Why Should You Dump WH?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- ROIC of 11.8% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $78.14 per share, Wyndham trades at 16.5x forward P/E. To fully understand why you should be careful with WH, check out our full research report (it’s free).
Marcus & Millichap (MMI)
Market Cap: $1.1 billion
Founded in 1971, Marcus & Millichap (NYSE: MMI) specializes in commercial real estate investment sales, financing, research, and advisory services.
Why Do We Think MMI Will Underperform?
- Lackluster 1.9% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Marcus & Millichap is trading at $29.09 per share, or 58.7x forward P/E. Dive into our free research report to see why there are better opportunities than MMI.
US Foods (USFD)
Market Cap: $18.07 billion
With a fleet of over 6,500 trucks delivering everything from fresh produce to frozen entrées, US Foods (NYSE: USFD) is a major foodservice distributor that supplies food products and services to approximately 250,000 restaurants, healthcare facilities, hotels, and educational institutions across the United States.
Why Do We Steer Clear of USFD?
- Products are reaching more customers as its unit sales averaged 2.4% growth over the past two years
- Operating margin of 3% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Low free cash flow margin of 2.5% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
US Foods’s stock price of $82.22 implies a valuation ratio of 16.7x forward P/E. If you’re considering USFD for your portfolio, see our FREE research report to learn more.
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