Most consumer discretionary businesses succeed or fail based on the broader economy. Thankfully for the industry, demand trends seem to be healthy as discretionary stocks have gained 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. On that note, here are three consumer stocks we’re passing on.
Wyndham (WH)
Market Cap: $8.26 billion
Established in 1981, Wyndham (NYSE:WH) is a global hotel franchising company with over 9,000 hotels across nearly 95 countries on six continents.
Why Is WH Not Exciting?
- Weak revenue per room over the past two years indicates challenges in maintaining pricing power and occupancy rates
- Anticipated sales growth of 6.5% for the next year implies demand will be shaky
- Low returns on capital reflect management’s struggle to allocate funds effectively
Wyndham is trading at $106.74 per share, or 22.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why WH doesn’t pass our bar.
Travel + Leisure (TNL)
Market Cap: $3.70 billion
Formerly known as Wyndham Destinations, Travel + Leisure (NYSE:TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.
Why Do We Think TNL Will Underperform?
- Sluggish trends in its tours conducted suggest customers aren’t adopting its solutions as quickly as the company hoped
- ROIC of 7.9% reflects management’s challenges in identifying attractive investment opportunities
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $55.18 per share, Travel + Leisure trades at 8.6x forward price-to-earnings. If you’re considering TNL for your portfolio, see our FREE research report to learn more.
Playa Hotels & Resorts (PLYA)
Market Cap: $1.64 billion
Sporting a roster of beachfront properties, Playa Hotels & Resorts (NASDAQ:PLYA) is an owner, operator, and developer of all-inclusive resorts in prime vacation destinations.
Why Are We Wary of PLYA?
- Softer revenue per room over the past two years suggests it might have to invest in new amenities such as restaurants and bars to attract customers
- Demand will likely fall over the next 12 months as Wall Street expects flat revenue
- Low returns on capital reflect management’s struggle to allocate funds effectively
Playa Hotels & Resorts’s stock price of $13.34 implies a valuation ratio of 26.9x forward price-to-earnings. To fully understand why you should be careful with PLYA, check out our full research report (it’s free).
Stocks We Like More
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