Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 13.8% over the past six months. This drawdown was significantly worse than the S&P 500’s 1.9% decline.

Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Keeping that in mind, here are three consumer stocks we’re passing on.

Hanesbrands (HBI)

Market Cap: $1.70 billion

A classic American staple founded in 1901, Hanesbrands (NYSE: HBI) is a clothing company known for its array of basic apparel including innerwear and activewear.

Why Should You Dump HBI?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Sales are projected to tank by 1.3% over the next 12 months as its demand continues evaporating
3. Sales were less profitable over the last five years as its earnings per share fell by 19% annually, worse than its revenue declines

At $4.85 per share, Hanesbrands trades at 9.3x forward P/E. Read our free research report to see why you should think twice about including HBI in your portfolio.

Caesars Entertainment (CZR)

Market Cap: $5.43 billion

Formerly Eldorado Resorts, Caesars Entertainment (NASDAQ: CZR) is a global gaming and hospitality company operating numerous casinos, hotels, and resort properties.

Why Are We Hesitant About CZR?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 25.8% annually
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Caesars Entertainment’s stock price of $26.20 implies a valuation ratio of 1.4x forward EV-to-EBITDA. If you’re considering CZR for your portfolio, see our FREE research report to learn more.

PENN Entertainment (PENN)

Market Cap: $2.15 billion

Established in 1982, PENN Entertainment (NASDAQ: PENN) is a diversified American operator of casinos, sports betting, and entertainment venues.

Why Do We Steer Clear of PENN?

1. 1% annual revenue growth over the last two years was slower than its consumer discretionary peers
2. Earnings per share fell by 30.4% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

PENN Entertainment is trading at $14.87 per share, or 1.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than PENN.

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