Most consumer discretionary businesses succeed or fail based on the broader economy. This sensitive demand profile can cause the industry to underperform when macro uncertainty enters the fray, and over the past six months, its 4.1% return has fallen short of the S&P 500’s 8.3% gain.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks best left ignored.
iHeartMedia (IHRT)
Market Cap: $569.3 million
Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ:IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.
Why Should You Sell IHRT?
- Annual revenue growth of 6.5% over the last five years was below our standards for the consumer discretionary sector
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $3.59 per share, iHeartMedia trades at 7.7x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including IHRT in your portfolio.
Monarch (MCRI)
Market Cap: $2.2 billion
Established in 1993, Monarch (NASDAQ:MCRI) operates luxury casinos and resorts, offering high-end gaming, dining, and hospitality experiences.
Why Are We Bearish on MCRI?
- Muted 14.1% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Free cash flow margin is forecasted to grow by 1.5 percentage points in the coming year, potentially giving the company more chips to play with
- Rising returns on capital show management is making relatively better investments
Monarch is trading at $122.75 per share, or 18.6x forward P/E. Check out our free in-depth research report to learn more about why MCRI doesn’t pass our bar.
Performance Food Group (PFGC)
Market Cap: $17.97 billion
With a massive network spanning 155 distribution centers and delivering over 250,000 different food products, Performance Food Group (NYSE:PFGC) distributes food and food-related products to over 300,000 restaurants, convenience stores, theaters, and institutions across North America.
Why Do We Steer Clear of PFGC?
- Products are seeing elevated demand as its unit sales averaged 6.6% growth over the past two years
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.2% for the last two years
- Rising returns on capital show management is making relatively better investments
Performance Food Group’s stock price of $114.39 implies a valuation ratio of 21.7x forward P/E. To fully understand why you should be careful with PFGC, check out our full research report (it’s free).
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