Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 3.7% return has lagged the S&P 500 by 5.2 percentage points.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one consumer stock poised to generate sustainable market-beating returns and two best left ignored.
Two Consumer Discretionary Stocks to Sell:
Comcast (CMCSA)
Market Cap: $85.63 billion
Formerly known as American Cable Systems, Comcast (NASDAQ:CMCSA) is a multinational telecommunications company offering a wide range of services.
Why Do We Avoid CMCSA?
-
Sluggish trends in its domestic broadband customers suggest customers aren’t adopting its solutions as quickly as the company hoped
-
Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 3.9 percentage points
-
Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Comcast is trading at $22.50 per share, or 6.5x forward P/E. Dive into our free research report to see why there are better opportunities than CMCSA.
Malibu Boats (MBUU)
Market Cap: $532.9 million
Founded in California in 1982, Malibu Boats (NASDAQ:MBUU) is a manufacturer of high-performance sports boats and luxury watercrafts.
Why Do We Steer Clear of MBUU?
-
Annual revenue growth of 1.5% over the last five years was below our standards for the consumer discretionary sector
-
Free cash flow margin is expected to remain in place over the coming year
-
Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $27.27 per share, Malibu Boats trades at 12.7x forward P/E. If you’re considering MBUU for your portfolio, see our FREE research report to learn more.
One Consumer Discretionary Stock to Watch:
Apple (AAPL)
Market Cap: $4.34 trillion
Creator of the iPhone and App Store, Apple (NASDAQ:AAPL) is a legendary developer of consumer electronics and software.
Why Does AAPL Catch Our Eye?
-
Apple’s revenue base is so large because nearly everyone in the U.S. has an iPhone, but this is a double-edged sword. Growth must now come from upgrades, a harder pitch that has resulted in sluggish top-line performance recently.
-
Still, Apple’s devices have endured for decades, speaking to its brand, design ethos, and technological chops. Its success is rare in the world of consumer electronics, which is fraught because of commoditization, competition, and obsolescence risk.
-
The company may not have the best gross margin because of its hardware orientation, but it still manages to produce elite operating and free cash flow margins. This shows it doesn’t need over-the-top marketing campaigns to convince people to buy its products.
