The performance of consumer discretionary businesses is closely linked to economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 32.3% over the past six months, outpacing S&P 500 by 4.3 percentage points.

Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here is one resilient consumer stock at the top of our wish list and two we’re passing on.

Two Consumer Discretionary Stocks to Sell:

WideOpenWest (WOW)

Market Cap: $438.8 million

Initially started in Denver as a cable television provider, WideOpenWest (NYSE: WOW) provides high-speed internet, cable, and telephone services to the Midwest and Southeast regions of the U.S.

Why Do We Think WOW Will Underperform?

1. Sluggish trends in its subscribers suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

WideOpenWest’s stock price of $5.12 implies a valuation ratio of 3x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including WOW in your portfolio.

Acushnet (GOLF)

Market Cap: $4.73 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 Do We Pass on GOLF?

1. Sales trends were unexciting over the last two years as its 2.2% annual growth was below the typical consumer discretionary company
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.1%
3. Waning returns on capital imply its previous profit engines are losing steam

Acushnet is trading at $80.68 per share, or 23.2x forward P/E. To fully understand why you should be careful with GOLF, check out our full research report (it’s free for active Edge members).

One Consumer Discretionary Stock to Watch:

Target Hospitality (TH)

Market Cap: $759.3 million

Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.

Why Are We Fans of TH?

1. Healthy operating margin of 25.9% shows it’s a well-run company with efficient processes
2. Strong free cash flow margin of 23% enables it to reinvest or return capital consistently
3. Returns on capital are growing as management capitalizes on its market opportunities

At $7.55 per share, Target Hospitality trades at 23.1x forward EV-to-EBITDA. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.

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