3 Consumer Stocks We Approach with Caution

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 21.2% over the past six months, outpacing S&P 500 by 6.8 percentage points.

Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks best left ignored.

iHeartMedia (IHRT)

Market Cap: $666.8 million

Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ:IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.

Why Do We Steer Clear of IHRT?

1. 4.9% annual revenue growth over the last five years was slower than its consumer discretionary peers
2. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

iHeartMedia is trading at $4.73 per share, or 1x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why IHRT doesn’t pass our bar.

Scholastic (SCHL)

Market Cap: $728.3 million

Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ:SCHL) is an international company specializing in children's publishing, education, and media services.

Why Do We Think SCHL Will Underperform?

1. Annual revenue growth of 1.9% 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 1.9% for the last two years
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $28.99 per share, Scholastic trades at 18.6x forward P/E. Dive into our free research report to see why there are better opportunities than SCHL.

RE/MAX (RMAX)

Market Cap: $170.3 million

Short for Real Estate Maximums, RE/MAX (NYSE:RMAX) operates a real estate franchise network spanning over 100 countries and territories.

Why Do We Avoid RMAX?

1. Demand for its offerings was relatively low as its number of agents has underwhelmed
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 7.1% annually
3. Projected 8 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

RE/MAX’s stock price of $7.90 implies a valuation ratio of 6.5x forward P/E. If you’re considering RMAX for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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