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 19.9% and beat the S&P 500 by 4.3 percentage points.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks we’re steering clear of.
Kontoor Brands (KTB)
Market Cap: $4.47 billion
Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE:KTB) is a clothing company known for its high-quality denim products.
Why Do We Think Twice About KTB?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Kontoor Brands is trading at $79 per share, or 14.7x forward P/E. To fully understand why you should be careful with KTB, check out our full research report (it’s free).
Movado (MOV)
Market Cap: $431.5 million
With its watches displayed in 20 museums around the world, Movado (NYSE:MOV) is a watchmaking company with a portfolio of watch brands and accessories.
Why Do We Think MOV Will Underperform?
- Sales tumbled by 4.3% annually over the last two years, showing consumer trends are working against its favor
- Projected sales growth of 1.5% for the next 12 months suggests sluggish demand
- Diminishing returns on capital suggest its earlier profit pools are drying up
Movado’s stock price of $19.49 implies a valuation ratio of 0.7x trailing 12-month price-to-sales. If you’re considering MOV for your portfolio, see our FREE research report to learn more.
United Airlines (UAL)
Market Cap: $34.42 billion
Founded in 1926, United Airlines Holdings (NASDAQ:UAL) operates a global airline network, providing passenger and cargo air transportation services across domestic and international routes.
Why Does UAL Worry Us?
- Performance surrounding its revenue passenger miles has lagged its peers
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.9% for the last two years
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $106.31 per share, United Airlines trades at 9.8x forward P/E. Check out our free in-depth research report to learn more about why UAL doesn’t pass our bar.
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