1 Consumer Stock to Research Further and 2 We Ignore
The performance of consumer discretionary businesses is closely linked to economic cycles. This volatility leads to big swings in stock prices that have worked in their favor recently - over the past six months, the industry has returned 16.3% and beat the S&P 500 by 4.6 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 is one resilient consumer stock at the top of our wish list and two that may face trouble.
Two Consumer Discretionary Stocks to Sell:
Paramount (PSKY)
Market Cap: $14.82 billion
Owner of Spongebob Squarepants and formerly known as ViacomCBS, Paramount Global (NASDAQ:PARA) is a major media conglomerate offering television, film production, and digital content across various global platforms.
Why Are We Out on PSKY?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3.2% for the last five years
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 5 percentage points
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $13.51 per share, Paramount trades at 14.6x forward P/E. Dive into our free research report to see why there are better opportunities than PSKY.
Xponential Fitness (XPOF)
Market Cap: $301.4 million
Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE:XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.
Why Should You Sell XPOF?
- 2.5% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Low free cash flow margin of 2.3% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Xponential Fitness’s stock price of $8.35 implies a valuation ratio of 14x forward P/E. Check out our free in-depth research report to learn more about why XPOF doesn’t pass our bar.
One Consumer Discretionary Stock to Watch:
Apple (AAPL)
Market Cap: $4.05 trillion
Creator of the iPhone and App Store, Apple (NASDAQ:AAPL) is a legendary developer of consumer electronics and software.
Why Do We Watch AAPL?
- Apple's revenue base is so large because nearly everyone in the U.S. has an iPhone, but this is a double-edged sword. Growth must now come from upgrades, a harder pitch that has resulted in sluggish top-line performance recently.
- Still, Apple's devices have endured for decades, speaking to its brand, design ethos, and technological chops. Its success is rare in the world of consumer electronics, which is fraught because of commoditization, competition, and obsolescence risk.
- The company may not have the best gross margin because of its hardware orientation, but it still manages to produce elite operating and free cash flow margins. This shows it doesn’t need over-the-top marketing campaigns to convince people to buy its products.
Apple is trading at $273.53 per share, or 33.3x forward price-to-earnings. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
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