Most consumer discretionary businesses succeed or fail based on the broader economy. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 3.6%. This drawdown was disheartening since the S&P 500 gained 4.5%.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks best left ignored.
Mattel (MAT)
Market Cap: $6.39 billion
Known for the creation of iconic toys such as Barbie and Hotwheels, Mattel (NASDAQ: MAT) is a global children's entertainment company specializing in the design and production of consumer products.
Why Does MAT Fall Short?
- Annual revenue growth of 1.8% over the last two years was below our standards for the consumer discretionary sector
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Waning returns on capital imply its previous profit engines are losing steam
Mattel’s stock price of $19.75 implies a valuation ratio of 12x forward P/E. To fully understand why you should be careful with MAT, check out our full research report (it’s free).
Compass (COMP)
Market Cap: $3.32 billion
Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass (NYSE: COMP) is a digital-first company operating a residential real estate brokerage in the United States.
Why Does COMP Give Us Pause?
- Performance surrounding its principal agents has lagged its peers
- Poor expense management has led to operating margin losses
- Low free cash flow margin of 1.3% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $6.44 per share, Compass trades at 14.7x forward P/E. Dive into our free research report to see why there are better opportunities than COMP.
Verizon (VZ)
Market Cap: $178.4 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 Dump VZ?
- Customer additions have disappointed over the past two years, indicating the company’s value proposition may not be resonating
- Projected 2.2 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Verizon is trading at $42.31 per share, or 9x forward P/E. If you’re considering VZ for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
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