Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 11% return was close to the S&P 500’s.
Although these companies have produced results lately, investors must be mindful because many are fads and only a few will stand the test of time. With that said, here are three consumer stocks we’re steering clear of.
AMC Networks (AMCX)
Market Cap: $382.2 million
Originally the joint-venture of four cable television companies, AMC Networks (NASDAQ: AMCX) is a broadcaster producing a diverse range of television shows and movies.
Why Do We Think AMCX Will Underperform?
- Sales tumbled by 3.9% annually over the last five years, showing consumer trends are working against its favor
- Free cash flow margin is expected to increase by 1.3 percentage points next year, suggesting the company will have more capital to invest or return to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $8.95 per share, AMC Networks trades at 4.2x forward P/E. Dive into our free research report to see why there are better opportunities than AMCX.
Adtalem (ATGE)
Market Cap: $3.84 billion
Formerly known as DeVry Education Group, Adtalem Global Education (NYSE: ATGE) is a global provider of workforce solutions and educational services.
Why Are We Out on ATGE?
- Muted 12.5% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Projected 1.2 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Adtalem is trading at $109.96 per share, or 2.1x forward price-to-sales. Check out our free in-depth research report to learn more about why ATGE doesn’t pass our bar.
Viking (VIK)
Market Cap: $32.65 billion
From a single river cruise offering to a fleet of 96 vessels across multiple continents, Viking (NYSE: VIK) operates a fleet of small luxury cruise ships offering river, ocean, and expedition voyages focused on cultural enrichment and destination immersion.
Why Do We Steer Clear of VIK?
- 17.1% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Poor expense management has led to an operating margin of 21.1% that is below the industry average
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 18% for the last two years
Viking’s stock price of $74.30 implies a valuation ratio of 23.5x forward P/E. If you’re considering VIK for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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