3 Consumer Stocks We Steer Clear Of

Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause the industry to underperform when macro uncertainty enters the fray, and over the past six months, its returns were flat while the S&P 500 climbed by 7.9%.

A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks that may face trouble.

Wolverine Worldwide (WWW)

Market Cap: $1.51 billion

Founded in 1883, Wolverine Worldwide (NYSE:WWW) is a global footwear company with a diverse portfolio of brands including Merrell, Hush Puppies, and Saucony.

Why Do We Steer Clear of WWW?

1. Sales stagnated over the last five years and signal the need for new growth strategies
2. Earnings growth underperformed the sector average over the last five years as its EPS grew by just 6.3% annually
3. Low free cash flow margin of 6.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

At $18.46 per share, Wolverine Worldwide trades at 12.2x forward P/E. Check out our free in-depth research report to learn more about why WWW doesn’t pass our bar.

Xponential Fitness (XPOF)

Market Cap: $252.5 million

Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE:XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.

Why Should You Sell XPOF?

1. Products and services have few die-hard fans as sales have declined by 4.4% annually over the last two years
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.3% for the last two years
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Xponential Fitness’s stock price of $6.01 implies a valuation ratio of 10.4x forward P/E. Dive into our free research report to see why there are better opportunities than XPOF.

Newmark (NMRK)

Market Cap: $2.67 billion

Founded in 1929, Newmark (NASDAQ:NMRK) provides commercial real estate services, including leasing advisory, global corporate services, investment sales and capital markets, property and facilities management, valuation and advisory, and consulting.

Why Do We Pass on NMRK?

1. Annual revenue growth of 12.5% over the last five years was below our standards for the consumer discretionary sector
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Returns on capital are growing as management invests in more worthwhile ventures

Newmark is trading at $15.05 per share, or 7.7x forward P/E. Read our free research report to see why you should think twice about including NMRK in your portfolio.

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