3 Consumer Stocks We Approach with Caution
The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3.9% return has lagged the S&P 500 by 17.2 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks we’re passing on.
Polaris (PII)
Market Cap: $2.99 billion
Founded in 1954, Polaris (NYSE:PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Why Are We Out on PII?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Poor free cash flow margin of 3.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Polaris is trading at $52.67 per share, or 18.6x forward P/E. If you’re considering PII for your portfolio, see our FREE research report to learn more.
Matthews (MATW)
Market Cap: $606.5 million
Originally a death care company, Matthews International (NASDAQ:MATW) is a diversified company offering ceremonial services, brand solutions and industrial technologies.
Why Do We Avoid MATW?
- Annual sales declines of 7.4% for the past five years show its products and services struggled to connect with the market
- Negative free cash flow raises questions about the return timeline for its investments
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $19.44 per share, Matthews trades at 24.8x forward P/E. Check out our free in-depth research report to learn more about why MATW doesn’t pass our bar.
Verizon (VZ)
Market Cap: $191 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?
- Sales were flat over the last five years, indicating it’s failed to expand its business
- Free cash flow margin is expected to increase by 1.3 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Verizon’s stock price of $46.10 implies a valuation ratio of 9.2x forward P/E. Dive into our free research report to see why there are better opportunities than VZ.
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