3 Consumer Stocks Skating on Thin Ice

The performance of consumer discretionary businesses is closely linked to economic cycles. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 11.4%. This drawdown was worse than the S&P 500’s 5.8% decline.

A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re swiping left on.

Redfin (RDFN)

Market Cap: $1.16 billion

Founded by a former medical school student, electrical engineer, and Amazon data engineer, Redfin (NASDAQ:RDFN) is a real estate company offering brokerage services through an online platform.

Why Do We Avoid RDFN?

1. Number of partner transactions has disappointed over the past two years, indicating weak demand for its offerings
2. Earnings per share fell by 14.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Negative EBITDA restricts its access to capital and increases the probability of shareholder dilution if things turn unexpectedly

At $8.92 per share, Redfin trades at 69.5x forward EV-to-EBITDA. To fully understand why you should be careful with RDFN, check out our full research report (it’s free).

VF Corp (VFC)

Market Cap: $5.24 billion

Owner of The North Face, Vans, and Supreme, VF Corp (NYSE:VFC) is a clothing conglomerate specializing in branded lifestyle apparel, footwear, and accessories.

Why Are We Out on VFC?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
3. 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

VF Corp is trading at $13.43 per share, or 14.7x forward P/E. Check out our free in-depth research report to learn more about why VFC doesn’t pass our bar.

Skechers (SKX)

Market Cap: $9.19 billion

Synonymous with "dad shoe", Skechers (NYSE:SKX) is a footwear company renowned for its comfortable, stylish, and affordable shoes for all ages.

Why Do We Think SKX Will Underperform?

1. Constant currency revenue growth has disappointed over the past two years and shows demand was soft
2. Estimated sales growth of 7.3% for the next 12 months implies demand will slow from its two-year trend
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Skechers’s stock price of $61.49 implies a valuation ratio of 14.4x forward P/E. Dive into our free research report to see why there are better opportunities than SKX.

Stocks We Like More

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