In This Article:
The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 11%. This drop was worse than the S&P 500’s 5.5% loss.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks best left ignored.
Choice Hotels (CHH)
Market Cap: $5.70 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE:CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Do We Steer Clear of CHH?
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Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
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Estimated sales growth of 1.3% for the next 12 months implies demand will slow from its two-year trend
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Eroding returns on capital suggest its historical profit centers are aging
Choice Hotels’s stock price of $123.67 implies a valuation ratio of 17.6x forward P/E. Read our free research report to see why you should think twice about including CHH in your portfolio, it’s free.
Target Hospitality (TH)
Market Cap: $683.8 million
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ:TH) is a provider of specialty workforce lodging accommodations and services.
Why Are We Hesitant About TH?
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Performance surrounding its utilized beds has lagged its peers
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Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
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Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 7.6% annually
At $6.92 per share, Target Hospitality trades at 8.9x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why TH doesn’t pass our bar.
Live Nation (LYV)
Market Cap: $31.64 billion
Owner of Ticketmaster and operator of music festival EDC, Live Nation (NYSE:LYV) is a company specializing in live event promotion, venue management, and ticketing services for concerts and shows.
Why Are We Cautious About LYV?
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Sluggish trends in its events suggest customers aren’t adopting its solutions as quickly as the company hoped
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Poor expense management has led to an operating margin of 4.1% that is below the industry average
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Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 1.9 percentage points over the next year