3 Consumer Stocks with Warning Signs

Most consumer discretionary businesses succeed or fail based on the broader economy. Thankfully for the industry, all signs are pointing up as discretionary stocks have gained 20.1% over the past six months, beating the S&P 500’s 12.7% return.

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

Service International (SCI)

Market Cap: $10.96 billion

Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.

Why Are We Out on SCI?

1. Number of funeral services performed has disappointed over the past two years, indicating weak demand for its offerings
2. Poor free cash flow margin of 14.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $78.18 per share, Service International trades at 18.9x forward P/E. Read our free research report to see why you should think twice about including SCI in your portfolio.

Mister Car Wash (MCW)

Market Cap: $1.88 billion

Formerly known as Hotshine Holdings, Mister Car Wash (NYSE:MCW) offers car washes across the United States through its conveyorized service.

Why Should You Sell MCW?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Returns on capital are increasing as management makes relatively better investment decisions
3. 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Mister Car Wash’s stock price of $5.75 implies a valuation ratio of 12.3x forward P/E. To fully understand why you should be careful with MCW, check out our full research report (it’s free for active Edge members).

Universal Technical Institute (UTI)

Market Cap: $1.43 billion

Founded in 1965, Universal Technical Institute (NYSE: UTI) is a leading provider of technical training programs, specializing in automotive, diesel, collision repair, motorcycle, and marine technicians.

Why Do We Think UTI Will Underperform?

1. Sluggish trends in its new students suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Free cash flow margin is forecasted to shrink by 4.1 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
3. Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate

Universal Technical Institute is trading at $26.30 per share, or 14.1x forward EV-to-EBITDA. If you’re considering UTI for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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