3 Consumer Stocks We Think Twice About

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 18.9% and beat the S&P 500 by 2.8 percentage points.

Although these companies have produced results lately, investors must be mindful because many are fads and only a few will stand the test of time. Taking that into account, here are three consumer stocks we’re passing on.

Charter (CHTR)

Market Cap: $36.35 billion

Operating as Spectrum, Charter (NASDAQ:CHTR) is a leading telecommunications company offering cable television, high-speed internet, and voice services across the United States.

Why Are We Wary of CHTR?

1. Sluggish trends in its internet subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
3. ROIC of 9.8% reflects management’s challenges in identifying attractive investment opportunities

Charter’s stock price of $264.97 implies a valuation ratio of 6.4x forward P/E. Check out our free in-depth research report to learn more about why CHTR doesn’t pass our bar.

PENN Entertainment (PENN)

Market Cap: $2.69 billion

Established in 1982, PENN Entertainment (NASDAQ:PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.

Why Should You Sell PENN?

1. Muted 1.4% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Negative free cash flow raises questions about the return timeline for its investments
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $19.04 per share, PENN Entertainment trades at 19.8x forward P/E. Read our free research report to see why you should think twice about including PENN in your portfolio.

JLL (JLL)

Market Cap: $14.86 billion

Founded in 1999 through the merger of Jones Lang Wootton and LaSalle Partners, JLL (NYSE:JLL) is a company specializing in real estate advisory and investment management services.

Why Do We Pass on JLL?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.9% over the last five years was below our standards for the consumer discretionary sector
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.2% for the last two years
3. ROIC of 7.8% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up

JLL is trading at $312.54 per share, or 17.6x forward P/E. If you’re considering JLL for your portfolio, see our FREE research report to learn more.

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