On the heels of the recent release of a weak jobs report, now may be the time to figure out what are the consumer discretionary stocks to sell. Sure, economists and pundits may argue that this latest jobs report is not necessarily a sign of a looming U.S. recession.
Still, you may want to err on the side of caution, especially with consumer discretionary stocks that trade at rich valuation. In a nutshell, consumer discretionary stocks are shares in companies that sell non-essential goods and services. These types of companies can perform very well during economic boom times.
In a recessionary environment, however, they can experience big drops in demand. In turn, leading to corresponding big swings in operating performance.
As slight changes in the macro backdrop could dramatically affect their performance, overvalued names in the consumer discretionary sector are most at risk of experiencing sharp price declines.
So, ahead of further indication that economic challenges are growing, what are the top consumer discretionary stocks to sell? Consider these seven. Each one is “priced for perfection,” and could take a big tumble if macro factors are no longer in their favor.
Beyond (BYON)
Beyond (NASDAQ:BYON) is an e-commerce company that you may know better as Overstock.com. Last year, Overstock.com bought bankrupt Bed Bath & Beyond’s brand name, re-launching its own flagship platform using the brand, and taking on the retailer’s more well-known name as part of its corporate name.
Investors at first reacted positively to these sweeping changes. During late 2023 and early 2024, BYON stock more than doubled in price. However, during the late spring to early summer, reported wider-than-expected losses weighted on Beyond’s stock price performance. Although subsequent quarterly results have been much more well-received, the above-mentioned macro data suggests that further trouble may lie ahead for the retailer and its turnaround plans.
Trading for just $10 per share, and with a market cap of around $475 million, BYON may appear as though it is discounted for uncertainty. However, net losses are expected to come in at $3.76 per share this year. If an economic slowdown stymies Beyond’s ability to narrow these losses in 2025, BYON may be on its way back to single-digit prices. Or worse, down to penny stock territory, or under $5 per share.
Cava Group (CAVA)
A super-high valuation is a big reason why fast-casual restaurant chain Cava Group (NYSE:CAVA) is one of the top consumer discretionary stocks to sell right now. As I have discussed in prior coverage of this high-flying dining stock, investors have considered Cava a buy at any price, due to perceptions that its the next big restaurant growth story.
Cava has indeed grown by leaps and bounds over the past years. The company, which currently has around 323 locations, is reportedly targeting an expansion to 1,000 locations, a more than threefold increase, between now and 2032. However, if an economic slowdown is imminent, it may prove difficult for the chain to sustain high levels of new location growth, at least in the near-term.
That’s not all. Even if macro conditions limit Cava’s expansion abilities, as Seeking Alpha commentator Gary Alexander recently argued, sluggish same-store sales growth could soon affect the performance of CAVA stock. This makes sense, given Wall Street’s distaste for slowing growth. It may be particularly troubling for CAVA, which trades for 232.1 times forward earnings. At such a rich valuation, a de-rating of 50%, even 75% could occur, and shares would arguably still be richly-priced.
DraftKings (DKNG)
DraftKings (NASDAQ:DKNG) may be one of the kings of U.S. legal online sports gambling. Yet while the company has grabbed nearly a third of this fast-growing, recently opened-up market, investors could be wrong in assuming that this will soon translate into exponential earnings growth. Forecasts call for DKNG’s earnings per share (EPS) to swing from negative 24 cents per share this year, to as much as $1.48 per share in 2025.
However, two factors could prevent this from happening. First, an economic slowdown could lead to decreased sports betting volumes, as recreational gamblers cut back. Second, even if DraftKings’ gaming volumes hold up, something else could affect its performance. As InvestorPlace’s William White reported Aug. 2, the company plans to pass along high gaming taxes onto bettors. How? Through a “gaming tax surcharge” on winnings.
This surcharge will be implemented in several states, including New York, starting next year. As even the most casual of sports gamblers know how much this could limit their wins and heighten their losses, it’s possible that DraftKings is underestimating how much this move will impact market share. With all of this in mind, consider DKNG stock a bad bet right now.
Floor & Decor Holdings (FND)
Floor & Decor Holdings (NYSE:FND) is a multi-channel retailer of flooring, tile, and fixtures. FND’s fiscal performance hinges heavily on the health of the housing and home improvement markets. As seen in Floor & Decor’s most recent fiscal results, store expansion has helped to mitigate the impact of the recent housing market slowdown.
While same-store sales fell 9% year-over-year last quarter, FND’s overall sales were down by just 0.2%. However, if an economic slowdown means a further weakening of demand, it may not be long before revenue and earnings declines intensify. As FND stock trades for a 57.7 times forward earnings, this could prove problematic for investors. Shares may not necessarily fall back to price levels last seen just before the pandemic housing boom.
However, a high double-digit percentage drop may not be out of the question. After all, larger rivals like Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) trade for between 20 and 25 times earnings. Yes, comparing HD and LOW to FD may be apples-to-oranges. Still, if growth continues to be put on hold, it makes little sense why Floor & Decor is deserving of such a high valuation premium to other home improvement consumer discretionary stocks.
Pool (POOL)
As you may have guessed, Pool (NYSE:POOL) is in the swimming pool supply equipment, and accessory business. A leading wholesaler in its niche, Pool has delivered strong fiscal performance over the past decade. This in turn has translated into strong stock performance.
Since August 2014, POOL stock is up by nearly 550%. Compare that to the S&P 500, which is up just 182% during the same time frame. Besides a more-than sixfold price surge, POOL has also steadily increased its dividend. Ten years ago, quarterly payouts came out to 22 cents per share. Today, investors receive $1.20 per share, or around 5.5 times this figure, each quarter. Yet while Pool may have previously been a winner, keep in mind the old Wall Street disclaimer: past performance is not indicative of future results.
Following this big run-up, shares today trade at a pricey 31.6 times forward earnings. This comes even as shares have pulled back in recent weeks, following the release of revised guidance. Only time will tell if Pool stays a long-term compounder, but for now, further uncertainty about economic growth could continue to weigh on shares.
Tesla (TSLA)
Up until mid-July, excitement over Tesla’s (NASDAQ:TSLA) AI plans was helping to outweigh headwinds with the company’s main operating business, which is of course the production and sale of electric vehicles.
However, “AI mania” has calmed down. This, coupled with the recent release of Tesla’s latest fiscal results, focus with TSLA stock has shifted back to present headwinds with the company’s EV business. As a result, shares have been sliding back to lower prices, after a short-lived surge early last month. Some may be tempted to “buy the dip,” but as I recently argued, whether as a wager on an EV rebound, or even as a bet on renewed AI mania, it makes little sense to buy TSLA now. Mostly, because there are better choices out there.
There are stocks, all trading at valuations far lower than Tesla’s forward multiple of 86.8, that have strong AI and EV catalysts on tap. Add in the possibility that the aforementioned jobs data means a further slump for Tesla’s automotive business, it’s clear why TSLA is one of the top consumer discretionary stocks to sell.
Wingstop (WING)
Wingstop (NASDAQ:WING) is another consumer discretionary stock in the fast casual restaurant space you should stay away from. Over the past year, a big increase in sales and earnings has resulted in strong share price performance for Wingstop. Since last summer, WING has surged by more than 116.3%.
However, after this hot run for this purveyor of hot wings, shares have hit a valuation of over 97 times forward earnings. Yes, a valuation alone doesn’t mean WING stock is doomed to tumble. A high valuation can persist, as long as the “growth story” continues. Based on Wingstop’s latest quarterly results, the “growth story” here clearly remains intact. Overall sales increased by 45.2% last quarter, with same store sales rising by 28.7%. Earnings were up nearly 70% year-over-year.
Yet while results have continued to come in strongly, that may not be the case in the coming quarters. Pretty soon, a possible U.S. economic slowdown may start to have a direct impact on Wingstop’s performance. Already “priced for perfection,” if subsequent growth falls short, shares could experience a sharp price correction. If you bought in at lower prices, it’s now time to fly the coop with Wingstop.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.