Consumer discretionary businesses are levered to the highs and lows of economic cycles. Thankfully for the industry, demand trends seem to be healthy as discretionary stocks have gained 7.4% over the past six months. This performance has nearly mirrored the S&P 500.
Although these companies have produced results lately, investors must be mindful because many are fads and only a few will stand the test of time. With that said, here are three consumer stocks we’re passing on.
Redfin (RDFN)
Market Cap: $1.43 billion
Founded by a former medical school student, electrical engineer, and Amazon data engineer, Redfin (NASDAQ: RDFN) is a real estate company offering brokerage services through an online platform.
Why Should You Sell RDFN?
- Number of brokerage transactions has disappointed over the past two years, indicating weak demand for its offerings
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 9.7% annually while its revenue grew
- Unprofitable operations could lead to additional rounds of dilutive equity financing if the credit window closes
Redfin is trading at $11.30 per share, or 86.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why RDFN doesn’t pass our bar.
Adtalem (ATGE)
Market Cap: $4.87 billion
Formerly known as DeVry Education Group, Adtalem Global Education (NYSE: ATGE) is a global provider of workforce solutions and educational services.
Why Does ATGE Fall Short?
- 11% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Estimated sales growth of 7.5% for the next 12 months implies demand will slow from its two-year trend
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $136.15 per share, Adtalem trades at 17.9x forward P/E. To fully understand why you should be careful with ATGE, check out our full research report (it’s free).
AMC Entertainment (AMC)
Market Cap: $1.48 billion
With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE: AMC) operates movie theaters primarily in the US and Europe.
Why Do We Steer Clear of AMC?
- Muted 5.7% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
AMC Entertainment’s stock price of $2.89 implies a valuation ratio of 2.3x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than AMC.
Stocks We Like More
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