Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 4.5%. This performance is a stark contrast from the S&P 500’s 5.6% gain.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks we’re steering clear of.
PlayStudios (MYPS)
Market Cap: $64.19 million
Founded by a team of former gaming industry executives, PlayStudios (NASDAQ: MYPS) offers free-to-play digital casino games.
Why Are We Out on MYPS?
- Annual revenue declines of 1.2% over the last five years indicate problems with its market positioning
- Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $0.51 per share, PlayStudios trades at 0.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MYPS.
Planet Fitness (PLNT)
Market Cap: $6.37 billion
Founded by two brothers who purchased a struggling gym, Planet Fitness (NYSE: PLNT) is a gym franchise that caters to casual fitness users by providing a friendly and inclusive atmosphere.
Why Do We Steer Clear of PLNT?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Free cash flow margin is forecasted to shrink by 2.6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Planet Fitness’s stock price of $80.04 implies a valuation ratio of 24.1x forward P/E. Read our free research report to see why you should think twice about including PLNT in your portfolio.
AMC Entertainment (AMC)
Market Cap: $640.8 million
With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE: AMC) operates movie theaters primarily in the US and Europe.
Why Do We Think Twice About AMC?
- Flat sales over the last two years suggest it must innovate and find new ways to grow
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
AMC Entertainment is trading at $1.21 per share, or 14.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why AMC doesn’t pass our bar.
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