Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 6.2% return over the past six months has trailed the S&P 500 by 4.8 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks we’re steering clear of.
Sonos (SONO)
Market Cap: $1.87 billion
A pioneer in connected home audio systems, Sonos (NASDAQ:SONO) offers a range of premium wireless speakers and sound systems.
Why Are We Out on SONO?
- Annual revenue declines of 2.6% over the last five years indicate problems with its market positioning
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 11.5% annually, worse than its revenue
- Poor free cash flow margin of 6.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $15.83 per share, Sonos trades at 17.6x forward P/E. To fully understand why you should be careful with SONO, check out our full research report (it’s free).
Callaway Golf Company (CALY)
Market Cap: $2.84 billion
Formed between the merger of Callaway and Topgolf, Callaway Golf Company (NYSE:CALY) sells golf equipment and operates technology-driven golf entertainment venues.
Why Do We Pass on CALY?
- Annual revenue declines of 2.5% over the last five years indicate problems with its market positioning
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 11.5 percentage points
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
Callaway Golf Company’s stock price of $15.86 implies a valuation ratio of 18.2x forward P/E. Dive into our free research report to see why there are better opportunities than CALY.
The Real Brokerage (REAX)
Market Cap: $578.7 million
Founded in Toronto, Canada in 2014, The Real Brokerage (NASDAQ:REAX) is a technology-driven real estate brokerage firm combining a tech-centric model with an agent-centric philosophy.
Why Is REAX Risky?
- Operating margin of -0.4% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Earnings growth underperformed the sector average over the last four years as its EPS grew by just 1.8% annually
- Free cash flow margin is not anticipated to grow over the next year
The Real Brokerage is trading at $2.65 per share, or 5.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including REAX in your portfolio.
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