Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can lead to some stock price volatility, but over the past six months, the industry has stayed on track as its 11.8% return was close to the S&P 500’s.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. Taking that into account, here are three consumer stocks best left ignored.
Sirius XM (SIRI)
Market Cap: $7.05 billion
Known for its commercial-free music channels, Sirius XM (NASDAQ:SIRI) is a broadcasting company that provides satellite radio and online radio services across North America.
Why Are We Out on SIRI?
- Sluggish trends in its core subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 12.3% for the last two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $21.03 per share, Sirius XM trades at 7.1x forward P/E. If you’re considering SIRI for your portfolio, see our FREE research report to learn more.
Rush Street Interactive (RSI)
Market Cap: $1.85 billion
Specializing in online casino gaming and sports betting, Rush Street Interactive (NYSE:RSI) is an operator of digital gaming platforms.
Why Should You Sell RSI?
- Demand for its offerings was relatively low as its number of monthly active users has underwhelmed
- Operating margin of 4.1% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Free cash flow margin is expected to remain in place over the coming year
Rush Street Interactive is trading at $18.89 per share, or 37.4x forward P/E. To fully understand why you should be careful with RSI, check out our full research report (it’s free).
Carnival (CCL)
Market Cap: $41.47 billion
Boasting outrageous amenities like a planetarium on board its ships, Carnival (NYSE:CCL) is one of the world's largest leisure travel companies and a prominent player in the cruise industry.
Why Do We Steer Clear of CCL?
- Performance surrounding its passenger cruise days has lagged its peers
- Poor free cash flow margin of 7.6% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Push for growth has led to negative returns on capital, signaling value destruction
Carnival’s stock price of $31.58 implies a valuation ratio of 12.8x forward P/E. Read our free research report to see why you should think twice about including CCL in your portfolio.
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