The performance of consumer discretionary businesses is closely linked to economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 7.5% over the past six months, similar to the S&P 500.
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 are three consumer stocks we’re passing on.
Optimum Communications (OPTU)
Market Cap: $752.7 million
Based in Long Island City, Optimum Communications (NYSE:OPTU) is a telecommunications company offering cable, internet, telephone, and television services across the United States.
Why Is OPTU Risky?
- Number of broadband subscribers has disappointed over the past two years, indicating weak demand for its offerings
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Optimum Communications’s stock price of $1.61 implies a valuation ratio of 7.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including OPTU in your portfolio.
Pool (POOL)
Market Cap: $7.58 billion
Founded in 1993 and headquartered in Louisiana, Pool (NASDAQ:POOL) is one of the largest wholesale distributors of swimming pool supplies, equipment, and related leisure products.
Why Do We Steer Clear of POOL?
- Sales trends were unexciting over the last five years as its 4.4% annual growth was below the typical consumer discretionary company
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 7.5% for the last two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Pool is trading at $207.95 per share, or 19x forward P/E. To fully understand why you should be careful with POOL, check out our full research report (it’s free).
Laureate Education (LAUR)
Market Cap: $4.38 billion
Founded in 1998 by Douglas L. Becker and based in Miami, Laureate Education (NASDAQ:LAUR) is a global network of higher education institutions.
Why Should You Sell LAUR?
- Demand for its offerings was relatively low as its number of enrolled students has underwhelmed
- Performance over the past five years shows its incremental sales were less profitable, as its 4.2% annual earnings per share growth trailed its revenue gains
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $31 per share, Laureate Education trades at 14.4x forward P/E. If you’re considering LAUR for your portfolio, see our FREE research report to learn more.
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