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 7.8% return was close to the S&P 500’s.
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. Taking that into account, here are three consumer stocks best left ignored.
Accel Entertainment (ACEL)
Market Cap: $1.02 billion
Established in Illinois, Accel Entertainment (NYSE:ACEL) is a provider of electronic gaming machines and interactive amusement terminals to bars and entertainment venues.
Why Do We Avoid ACEL?
- Performance surrounding its video gaming terminals sold has lagged its peers
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Accel Entertainment is trading at $12.11 per share, or 6x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than ACEL.
Lincoln Educational (LINC)
Market Cap: $1.43 billion
Established in 1946, Lincoln Educational (NASDAQ:LINC) is a provider of specialized technical training in the United States, offering career-oriented programs to provide practical skills required in the workforce.
Why Should You Sell LINC?
- Number of enrolled students has disappointed over the past two years, indicating weak demand for its offerings
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $45.10 per share, Lincoln Educational trades at 57.8x forward P/E. Read our free research report to see why you should think twice about including LINC in your portfolio.
Mohawk Industries (MHK)
Market Cap: $5.94 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?
- 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 2% for the last five years
- Free cash flow margin is forecasted to shrink by 2 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Returns on capital haven’t budged, indicating management couldn’t drive additional value creation
Mohawk Industries’s stock price of $97.40 implies a valuation ratio of 11x forward P/E. To fully understand why you should be careful with MHK, check out our full research report (it’s free).
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