The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand trends may be working against them as the industry’s returns were flat while the S&P 500 was up 8%.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks we’re passing on.
Boyd Gaming (BYD)
Market Cap: $6.44 billion
Run by the Boyd family, Boyd Gaming (NYSE:BYD) is a diversified operator of gaming entertainment properties across the United States, offering casino games, hotel accommodations, and dining.
Why Should You Sell BYD?
- 12.7% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Boyd Gaming’s stock price of $86.30 implies a valuation ratio of 11.9x forward P/E. To fully understand why you should be careful with BYD, check out our full research report (it’s free).
Marriott (MAR)
Market Cap: $103.2 billion
Founded by J. Willard Marriott in 1927, Marriott International (NASDAQ:MAR) is a global hospitality company with a portfolio of over 7,000 properties and 30 brands, spanning 130+ countries and territories.
Why Do We Think MAR Will Underperform?
- Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
- Free cash flow margin is not anticipated to grow over the next year
Marriott is trading at $395.25 per share, or 33.2x forward P/E. Dive into our free research report to see why there are better opportunities than MAR.
RE/MAX (RMAX)
Market Cap: $198.5 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 Pass on RMAX?
- Performance surrounding its agents has lagged its peers
- Earnings per share fell by 9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Low free cash flow margin of 11.7% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $9.34 per share, RE/MAX trades at 0.6x forward price-to-sales. Read our free research report to see why you should think twice about including RMAX in your portfolio.
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