3 Consumer Stocks We Find Risky

The performance of consumer discretionary businesses is closely linked to economic cycles. Thankfully for the industry, all signs are pointing up as discretionary stocks have gained 19.9% over the past six months, beating the S&P 500’s 15.6% return.

Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks best left ignored.

Disney (DIS)

Market Cap: $204.5 billion

Founded by brothers Walt and Roy, Disney (NYSE:DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.

Why Are We Out on DIS?

1. Sizable revenue base leads to growth challenges as its 3.8% annual revenue increases over the last two years fell short of other consumer discretionary companies
2. Projected 4 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
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Disney’s stock price of $113.26 implies a valuation ratio of 18.9x forward P/E. Read our free research report to see why you should think twice about including DIS in your portfolio.

Frontdoor (FTDR)

Market Cap: $4.87 billion

Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ:FTDR) is a provider of home warranty and service plans.

Why Are We Wary of FTDR?

1. Sales trends were unexciting over the last five years as its 6.8% annual growth was below the typical consumer discretionary company
2. Demand for its offerings was relatively low as its number of home service plans has underwhelmed
3. Estimated sales growth of 8.5% for the next 12 months is soft and implies weaker demand

Frontdoor is trading at $66.88 per share, or 18.5x forward P/E. To fully understand why you should be careful with FTDR, check out our full research report (it’s free).

Matthews (MATW)

Market Cap: $771.3 million

Originally a death care company, Matthews International (NASDAQ:MATW) is a diversified company offering ceremonial services, brand solutions and industrial technologies.

Why Should You Sell MATW?

1. Annual revenue declines of 6.5% over the last two years indicate problems with its market positioning
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 14.8% annually
3. Cash burn makes us question whether it can achieve sustainable long-term growth

At $25.05 per share, Matthews trades at 16.4x forward EV-to-EBITDA. If you’re considering MATW for your portfolio, see our FREE research report to learn more.

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