Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3.9% return has lagged the S&P 500 by 17.2 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Keeping that in mind, here are three consumer stocks that may face trouble.
Mohawk Industries (MHK)
Market Cap: $7.55 billion
Established in 1878, Mohawk Industries (NYSE:MHK) is a leading producer of floor-covering products for both residential and commercial applications.
Why Are We Out on MHK?
- Flat sales over the last five years suggest it must innovate and find new ways to grow
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 4.4 percentage points over the next year
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
Mohawk Industries’s stock price of $124.84 implies a valuation ratio of 13.5x forward P/E. If you’re considering MHK for your portfolio, see our FREE research report to learn more.
MasterCraft (MCFT)
Market Cap: $488.7 million
Started by a waterskiing instructor, MasterCraft (NASDAQ:MCFT) specializes in designing, manufacturing, and selling sport boats.
Why Do We Avoid MCFT?
- Products and services aren’t resonating with the market as its revenue declined by 7.9% annually over the last five years
- Forecasted free cash flow margin suggests the company will fail to improve its cash conversion over the next year
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
MasterCraft is trading at $20.08 per share, or 10.2x forward P/E. Read our free research report to see why you should think twice about including MCFT in your portfolio.
Frontdoor (FTDR)
Market Cap: $5.06 billion
Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ:FTDR) is a provider of home warranty and service plans.
Why Do We Steer Clear of FTDR?
- 6.7% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.8 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $73.55 per share, Frontdoor trades at 14.7x forward P/E. Dive into our free research report to see why there are better opportunities than FTDR.
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