The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 7.5% return has lagged the S&P 500 by 2.6 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks that may face trouble.
Kontoor Brands (KTB)
Market Cap: $3.30 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 Should You Dump KTB?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 13% for the last two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $59.43 per share, Kontoor Brands trades at 10.2x forward P/E. Read our free research report to see why you should think twice about including KTB in your portfolio.
Charter (CHTR)
Market Cap: $24.56 billion
Operating as Spectrum, Charter (NASDAQ:CHTR) is a leading telecommunications company offering cable television, high-speed internet, and voice services across the United States.
Why Is CHTR Risky?
- Demand for its offerings was relatively low as its number of internet subscribers has underwhelmed
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Improving returns on capital suggest management is identifying more profitable investments
Charter is trading at $190.25 per share, or 4.6x forward P/E. If you’re considering CHTR for your portfolio, see our FREE research report to learn more.
European Wax Center (EWCZ)
Market Cap: $176.5 million
Founded by two siblings, European Wax Center (NASDAQ:EWCZ) is a beauty and waxing salon chain specializing in professional wax services and skincare products.
Why Do We Steer Clear of EWCZ?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Earnings per share lagged its peers over the last four years as they only grew by 4% annually
- Underwhelming 11.8% return on capital reflects management’s difficulties in finding profitable growth opportunities
European Wax Center’s stock price of $4.04 implies a valuation ratio of 8.1x forward P/E. Dive into our free research report to see why there are better opportunities than EWCZ.
Stocks We Like More
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