The performance of consumer discretionary businesses is closely linked to economic cycles. Thankfully for the industry, demand trends seem to be healthy as discretionary stocks have gained 6.1% over the past six months. This performance has nearly mirrored the S&P 500.
Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re swiping left on.
Hilton (HLT)
Market Cap: $62.34 billion
Founded in 1919, Hilton Worldwide (NYSE:HLT) is a global hospitality company with a portfolio of hotel brands.
Why Are We Cautious About HLT?
- Sizable revenue base leads to growth challenges as its 3.4% annual revenue increases over the last five years fell short of other consumer discretionary companies
- Revenue per room has underperformed over the past two years, suggesting it may need to develop new facilities
- Estimated sales growth of 8.6% for the next 12 months implies demand will slow from its two-year trend
Hilton is trading at $259.10 per share, or 32.4x forward price-to-earnings. To fully understand why you should be careful with HLT, check out our full research report (it’s free).
Choice Hotels (CHH)
Market Cap: $6.64 billion
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE:CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Why Are We Hesitant About CHH?
- Revenue per room has disappointed over the past two years due to weaker trends in its daily rates and occupancy levels
- Estimated sales growth of 3.8% for the next 12 months implies demand will slow from its two-year trend
- Eroding returns on capital suggest its historical profit centers are aging
Choice Hotels’s stock price of $144.19 implies a valuation ratio of 20.2x forward price-to-earnings. Read our free research report to see why you should think twice about including CHH in your portfolio.
CBRE (CBRE)
Market Cap: $41.32 billion
Established in 1906, CBRE (NYSE:CBRE) is one of the largest commercial real estate services firms in the world.
Why Do We Avoid CBRE?
- Scale is a double-edged sword because it limits the company's growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 7.7% for the last two years
- Operating margin of 3.7% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Poor free cash flow margin of 2.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $132.80 per share, CBRE trades at 23.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why CBRE doesn’t pass our bar.
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