3 Consumer Stocks with Warning Signs

Most consumer discretionary businesses succeed or fail based on the broader economy. 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 16.3% and beat the S&P 500 by 4.6 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. With that said, here are three consumer stocks that may face trouble.

Bally's (BALY)

Market Cap: $804.3 million

Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE:BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.

Why Is BALY Risky?

1. Annual revenue growth of 2% over the last two years was below our standards for the consumer discretionary sector
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $16.33 per share, Bally's trades at 11.9x forward EV-to-EBITDA. If you’re considering BALY for your portfolio, see our FREE research report to learn more.

Clarus (CLAR)

Market Cap: $128.6 million

Initially a financial services business, Clarus (NASDAQ:CLAR) designs, manufactures, and distributes outdoor equipment and lifestyle products.

Why Are We Out on CLAR?

1. 4.2% annual revenue growth over the last five years was slower than its consumer discretionary peers
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Clarus’s stock price of $3.36 implies a valuation ratio of 22.3x forward P/E. Dive into our free research report to see why there are better opportunities than CLAR.

Verizon (VZ)

Market Cap: $170.7 billion

Formed in 1984 as Bell Atlantic after the breakup of Bell System into seven companies, Verizon (NYSE:VZ) is a telecom giant providing a range of communications and internet services.

Why Do We Pass on VZ?

1. Underwhelming customer growth over the past two years shows the company faced challenges in winning new contracts
2. Free cash flow margin is not anticipated to grow over the next year
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Verizon is trading at $40.42 per share, or 8.6x forward P/E. Read our free research report to see why you should think twice about including VZ in your portfolio.

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