3 Consumer Stocks with Open Questions

Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 6.7% return has lagged the S&P 500 by 3.3 percentage points.

Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks we’re steering clear of.

Peloton (PTON)

Market Cap: $2.87 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 Steer Clear of PTON?

1. Number of connected fitness subscribers has disappointed over the past two years, indicating weak demand for its offerings
2. Persistent operating margin losses suggest the business manages its expenses poorly
3. Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 16.5% annually

Peloton’s stock price of $6.38 implies a valuation ratio of 37.6x forward P/E. Check out our free in-depth research report to learn more about why PTON doesn’t pass our bar.

Columbia Sportswear (COLM)

Market Cap: $2.70 billion

Originally founded as a hat store in 1938, Columbia Sportswear (NASDAQ:COLM) is a manufacturer of outerwear, sportswear, and footwear designed for outdoor enthusiasts.

Why Is COLM Risky?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Sales are projected to be flat over the next 12 months and imply weak demand
3. Eroding returns on capital suggest its historical profit centers are aging

Columbia Sportswear is trading at $49.86 per share, or 17.4x forward P/E. If you’re considering COLM for your portfolio, see our FREE research report to learn more.

Warner Bros. Discovery (WBD)

Market Cap: $57.22 billion

Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ:WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.

Why Do We Think WBD Will Underperform?

1. Annual revenue declines of 5.1% over the last two years indicate problems with its market positioning
2. Historical operating margin losses point to an inefficient cost structure
3. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 32.2% annually

At $22.93 per share, Warner Bros. Discovery trades at 6.5x forward EV-to-EBITDA. To fully understand why you should be careful with WBD, check out our full research report (it’s free for active Edge members).

Stocks We Like More

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