Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 1.3%. This performance was discouraging since the S&P 500 returned 5.6%.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. With that said, here are three consumer stocks best left ignored.
Lincoln Educational (LINC)
Market Cap: $734.2 million
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 Do We Steer Clear of LINC?
- Demand for its offerings was relatively low as its number of enrolled students has underwhelmed
- Negative free cash flow raises questions about the return timeline for its investments
- Diminishing returns on capital suggest its earlier profit pools are drying up
Lincoln Educational is trading at $23.24 per share, or 11.8x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why LINC doesn’t pass our bar.
Sabre (SABR)
Market Cap: $1.28 billion
Originally a division of American Airlines, Sabre (NASDAQ:SABR) is a technology provider for the global travel and tourism industry.
Why Are We Out on SABR?
- Sluggish trends in its central reservation system transactions suggest customers aren’t adopting its solutions as quickly as the company hoped
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $3.28 per share, Sabre trades at 17.9x forward P/E. Dive into our free research report to see why there are better opportunities than SABR.
The Real Brokerage (REAX)
Market Cap: $905.2 million
Founded in Toronto, Canada in 2014, The Real Brokerage (NASDAQ:REAX) is a technology-driven real estate brokerage firm combining a tech-centric model with an agent-centric philosophy.
Why Do We Think REAX Will Underperform?
- Persistent operating margin losses suggest the business manages its expenses poorly
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 9% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.3% for the last two years
The Real Brokerage’s stock price of $4.35 implies a valuation ratio of 16.9x forward EV-to-EBITDA. To fully understand why you should be careful with REAX, check out our full research report (it’s free).
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