The performance of consumer discretionary businesses is closely linked to economic cycles. This volatility leads to big swings in stock prices that have worked in their favor recently - over the past six months, the industry has returned 22.7% and beat the S&P 500 by 5.8 percentage points.

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. Keeping that in mind, here are three consumer stocks we’re steering clear of.

Disney (DIS)

Market Cap: $202.6 billion

Founded by brothers Walt and Roy, Disney (NYSE:DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.

Why Do We Pass on DIS?

1. Annual sales growth of 4.2% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
2. The company’s capital intensity will likely increase as its free cash flow margin is anticipated to drop by 2.6 percentage points over the next year
3. Underwhelming 5.4% return on capital reflects management’s difficulties in finding profitable growth opportunities

Disney’s stock price of $111.95 implies a valuation ratio of 20.2x forward price-to-earnings. Check out our free in-depth research report to learn more about why DIS doesn’t pass our bar.

Warner Bros. Discovery (WBD)

Market Cap: $25.02 billion

Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ:WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.

Why Do We Think WBD Will Underperform?

1. Products and services have few die-hard fans as sales have declined by 5.7% annually over the last two years
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 16.3% annually while its revenue grew
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Warner Bros. Discovery is trading at $10.21 per share, or 17x forward price-to-earnings. Read our free research report to see why you should think twice about including WBD in your portfolio, it’s free.

fuboTV (FUBO)

Market Cap: $1.37 billion

Originally launched as a soccer streaming platform, fuboTV (NYSE:FUBO) is a video streaming service specializing in live sports, news, and entertainment content.

Why Are We Wary of FUBO?

1. Historical operating losses point to an inefficient cost structure
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $4.04 per share, fuboTV trades at 0.8x forward price-to-sales. Check out our free in-depth research report to learn more about why FUBO doesn’t pass our bar.

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