Most consumer discretionary businesses succeed or fail based on the broader economy. Lately, it seems like demand trends have worked in their favor as the industry has returned 8.1% over the past six months, similar to the S&P 500.

Regardless of these results, investors should tread carefully as many companies in this space are unpredictable because they lack recurring revenue business models. Keeping that in mind, here are three consumer stocks we’re swiping left on.

Levi's (LEVI)

Market Cap: $7.11 billion

Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE:LEVI) is an apparel company renowned for its iconic denim products and classic American style.

Why Do We Pass on LEVI?

1. Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
2. Estimated sales decline of 1.2% for the next 12 months implies a challenging demand environment
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Levi’s stock price of $18.01 implies a valuation ratio of 12.9x forward price-to-earnings. Check out our free in-depth research report to learn more about why LEVI doesn’t pass our bar.

Soho House (SHCO)

Market Cap: $1.37 billion

Boasting fancy locations in hubs such as NYC and Miami, Soho House (NYSE:SHCO) is a global hospitality brand offering exclusive private member clubs, hotels, and restaurants.

Why Are We Wary of SHCO?

1. Performance surrounding its members has lagged its peers
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. 16× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

Soho House is trading at $7.19 per share, or 7.7x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than SHCO.

Sabre (SABR)

Market Cap: $1.59 billion

Originally a division of American Airlines, Sabre (NASDAQ:SABR) is a technology provider for the global travel and tourism industry.

Why Do We Think SABR Will Underperform?

1. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
2. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

At $4.20 per share, Sabre trades at 22.5x forward price-to-earnings. To fully understand why you should be careful with SABR, check out our full research report (it’s free).

Stocks We Like More

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