Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 4.6% over the past six months. This drop is a noticeable divergence from the S&P 500’s 12.8% return.
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 that may face trouble.
PlayStudios (MYPS)
Market Cap: $49.37 million
Founded by a team of former gaming industry executives, PlayStudios (NASDAQ: MYPS) offers free-to-play digital casino games.
Why Do We Think MYPS Will Underperform?
- Annual sales declines of 4.1% for the past five years show its products and services struggled to connect with the market
- Low free cash flow margin of 12.3% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $4.11 per share, PlayStudios trades at 0.3x forward price-to-sales. To fully understand why you should be careful with MYPS, check out our full research report (it’s free).
AMC Networks (AMCX)
Market Cap: $445.9 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 Should You Sell AMCX?
- Products and services aren’t resonating with the market as its revenue declined by 5% annually over the last five years
- Free cash flow margin is forecasted to shrink by 3.2 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
AMC Networks is trading at $10.82 per share, or 3.1x forward P/E. Read our free research report to see why you should think twice about including AMCX in your portfolio.
Red Rock Resorts (RRR)
Market Cap: $2.87 billion
Founded in 1976, Red Rock Resorts (NASDAQ: RRR) operates a range of casino resorts and entertainment properties, primarily in the Las Vegas metropolitan area.
Why Do We Pass on RRR?
- Annual revenue growth of 6.3% over the last five years was below our standards for the consumer discretionary sector
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Red Rock Resorts’s stock price of $49.52 implies a valuation ratio of 14.2x forward P/E. Check out our free in-depth research report to learn more about why RRR doesn’t pass our bar.
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