Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause the industry to underperform when macro uncertainty enters the fray, and over the past six months, its 3.8% return has fallen short of the S&P 500’s 6.3% gain.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. On that note, here are three consumer stocks we’re steering clear of.
Peloton (PTON)
Market Cap: $2.45 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?
- Performance surrounding its connected fitness subscribers has lagged its peers
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 22.3% annually, worse than its revenue
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 3.6 percentage points over the next year
At $5.72 per share, Peloton trades at 20.4x forward P/E. Read our free research report to see why you should think twice about including PTON in your portfolio.
Pool (POOL)
Market Cap: $7.01 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 Are We Out on POOL?
- 4.4% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Poor free cash flow margin of 7.5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Pool’s stock price of $204.98 implies a valuation ratio of 17.4x forward P/E. If you’re considering POOL for your portfolio, see our FREE research report to learn more.
Planet Fitness (PLNT)
Market Cap: $4.07 billion
Founded by two brothers who purchased a struggling gym, Planet Fitness (NYSE: PLNT) is a gym franchise that caters to casual fitness users by providing a friendly and inclusive atmosphere.
Why Do We Pass on PLNT?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Free cash flow margin is forecasted to shrink by 6.6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
Planet Fitness is trading at $53.22 per share, or 15.9x forward P/E. To fully understand why you should be careful with PLNT, check out our full research report (it’s free).
Stocks We Like More
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