The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 6.3% return was close to the S&P 500’s.
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. Keeping that in mind, here are three consumer stocks we’re steering clear of.
Peloton (PTON)
Market Cap: $3.42 billion
Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.
Why Do We Think PTON Will Underperform?
- Sluggish trends in its connected fitness subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Poor expense management has led to operating losses
- Negative free cash flow raises questions about the return timeline for its investments
Peloton is trading at $8.31 per share, or 12.7x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than PTON.
Verizon (VZ)
Market Cap: $182.4 billion
Formed in 1984 as Bell Atlantic after the breakup of Bell System into seven companies, Verizon (NYSE:VZ) is a telecom giant providing a range of communications and internet services.
Why Should You Sell VZ?
- Underwhelming customer growth over the past two years shows the company faced challenges in winning new contracts
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.7%
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $43.55 per share, Verizon trades at 9.1x forward price-to-earnings. To fully understand why you should be careful with VZ, check out our full research report (it’s free).
Tapestry (TPR)
Market Cap: $17.47 billion
Originally founded as Coach, Tapestry (NYSE:TPR) is an American fashion conglomerate with a portfolio of luxury brands offering high-quality accessories and fashion products.
Why Are We Cautious About TPR?
- Lackluster 1.4% annual revenue growth over the last two years indicates the company is losing ground to competitors
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Projected sales growth of 2.9% for the next 12 months suggests sluggish demand
Tapestry’s stock price of $83.66 implies a valuation ratio of 17x forward price-to-earnings. Check out our free in-depth research report to learn more about why TPR doesn’t pass our bar.
Stocks We Like More
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