The performance of consumer discretionary businesses is closely linked to 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 5.3% return has fallen short of the S&P 500’s 10% gain.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. On that note, here are three consumer stocks we’re swiping left on.
TEGNA (TGNA)
Market Cap: $3.09 billion
Spun out of Gannett in 2015, TEGNA (NYSE: TGNA) is a media company operating a network of television stations and digital platforms, focusing on local news and community content.
Why Do We Pass on TGNA?
- Muted 1.3% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 7.9% annually
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
TEGNA’s stock price of $19.00 implies a valuation ratio of 8.1x forward P/E. If you’re considering TGNA for your portfolio, see our FREE research report to learn more.
Sabre (SABR)
Market Cap: $513.4 million
Originally a division of American Airlines, Sabre (NASDAQ: SABR) is a technology provider for the global travel and tourism industry.
Why Should You Sell SABR?
- Number of central reservation system transactions has disappointed over the past two years, indicating weak demand for its offerings
- Negative free cash flow raises questions about the return timeline for its investments
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $1.31 per share, Sabre trades at 10.5x forward P/E. Read our free research report to see why you should think twice about including SABR in your portfolio.
Compass (COMP)
Market Cap: $7.05 billion
Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass (NYSE: COMP) is a digital-first company operating a residential real estate brokerage in the United States.
Why Do We Think COMP Will Underperform?
- Performance surrounding its principal agents has lagged its peers
- Persistent operating margin losses suggest the business manages its expenses poorly
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Compass is trading at $12.45 per share, or 21.9x forward P/E. Dive into our free research report to see why there are better opportunities than COMP.
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