3 Consumer Stocks We Keep Off Our Radar

The performance of consumer discretionary businesses is closely linked to economic cycles. Thankfully for the industry, all signs are pointing up as discretionary stocks have gained 12.3% over the past six months, beating the S&P 500’s 10.4% 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 we’re steering clear of.

Stitch Fix (SFIX)

Market Cap: $668.3 million

One of the original subscription box companies, Stitch Fix (NASDAQ:SFIX) is an online personal styling and fashion service that curates personalized clothing selections for customers.

Why Do We Pass on SFIX?

1. Sluggish trends in its active clients suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Poor free cash flow margin of 0.5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Stitch Fix’s stock price of $4.99 implies a valuation ratio of 0.5x forward price-to-sales. To fully understand why you should be careful with SFIX, check out our full research report (it’s free).

Comcast (CMCSA)

Market Cap: $103.4 billion

Formerly known as American Cable Systems, Comcast (NASDAQ:CMCSA) is a multinational telecommunications company offering a wide range of services.

Why Do We Steer Clear of CMCSA?

1. Demand for its offerings was relatively low as its number of domestic broadband customers has underwhelmed
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 11.8% for the last two years
3. Returns on capital are growing as management invests in more worthwhile ventures

Comcast is trading at $28.44 per share, or 7.2x forward P/E. Read our free research report to see why you should think twice about including CMCSA in your portfolio.

Lucky Strike (LUCK)

Market Cap: $1.23 billion

Born from the transformation of traditional bowling alleys into modern entertainment destinations, Lucky Strike (NYSE:LUCK) operates bowling alleys and other entertainment venues with upscale amenities, arcade games, and food and beverage services across North America.

Why Are We Out on LUCK?

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. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $8.83 per share, Lucky Strike trades at 51.5x forward P/E. Check out our free in-depth research report to learn more about why LUCK doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

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