The performance of consumer discretionary businesses is closely linked to economic cycles. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 13.7% over the past six months. This drawdown was significantly worse than the S&P 500’s 2.4% loss.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks we’re steering clear of.
Strategic Education (STRA)
Market Cap: $2.18 billion
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ:STRA) is a career-focused higher education provider.
Why Is STRA Risky?
- Demand for its offerings was relatively low as its number of domestic students has underwhelmed
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 6.6% annually while its revenue grew
- Underwhelming 3.7% return on capital reflects management’s difficulties in finding profitable growth opportunities
Strategic Education’s stock price of $91.36 implies a valuation ratio of 16x forward P/E. If you’re considering STRA for your portfolio, see our FREE research report to learn more.
Lucky Strike (LUCK)
Market Cap: $1.21 billion
Born from the transformation of traditional bowling alleys into modern entertainment destinations, Lucky Strike (NYSE:LUCK) operates bowling alleys and other entertainment venues with upscale amenities, arcade games, and food and beverage services across North America.
Why Do We Steer Clear of LUCK?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $8.63 per share, Lucky Strike trades at 28.7x forward P/E. To fully understand why you should be careful with LUCK, check out our full research report (it’s free).
1-800-FLOWERS (FLWS)
Market Cap: $312.7 million
Founded in 1976, 1-800-FLOWERS (NASDAQ:FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
Why Do We Avoid FLWS?
- Sales tumbled by 9.9% annually over the last two years, showing consumer trends are working against its favor
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 24.2% annually
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
1-800-FLOWERS is trading at $4.92 per share, or 16.7x forward P/E. Check out our free in-depth research report to learn more about why FLWS doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
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