3 Consumer Stocks with Open Questions

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 3.1% over the past six months. This performance was discouraging since the S&P 500 returned 6.6%.

Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. With that said, here are three consumer stocks we’re passing on.

Figs (FIGS)

Market Cap: $2.85 billion

Rising to fame via TikTok and founded in 2013 by Heather Hasson and Trina Spear, Figs (NYSE:FIGS) is a healthcare apparel company known for its stylish approach to medical attire and uniforms.

Why Do We Pass on FIGS?

1. Sluggish trends in its active customers suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Earnings per share have dipped by 3.6% annually over the past four years, which is concerning because stock prices follow EPS over the long term
3. Free cash flow margin is not anticipated to grow over the next year

Figs’s stock price of $16.80 implies a valuation ratio of 67.1x forward P/E.

Acushnet (GOLF)

Market Cap: $5.93 billion

Producer of the acclaimed Titleist Pro V1 golf ball, Acushnet (NYSE:GOLF) is a design and manufacturing company specializing in performance-driven golf products.

Why Should You Sell GOLF?

1. 9.7% annual revenue growth over the last five years was slower than its consumer discretionary peers
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.8% for the last two years
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $101.32 per share, Acushnet trades at 24.4x forward P/E.

Frontdoor (FTDR)

Market Cap: $4.76 billion

Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ:FTDR) is a provider of home warranty and service plans.

Why Is FTDR Risky?

1. Sales trends were unexciting over the last five years as its 7.3% annual growth was below the typical consumer discretionary company
2. Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 2.8 percentage points over the next year
3. Improving returns on capital reflect management’s ability to monetize investments

Frontdoor is trading at $67.46 per share, or 15.1x forward P/E.

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