The performance of consumer discretionary businesses is closely linked to economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 6.3% return over the past six months has trailed the S&P 500 by 6.4 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks that may face trouble.
ADT (ADT)
Market Cap: $5.33 billion
Founded in 1874 and headquartered in Boca Raton, Florida, ADT (NYSE: ADT) is a provider of security, automation, and smart home solutions, offering comprehensive services for home and business protection.
Why Should You Sell ADT?
- Flat sales over the last five years suggest it must innovate and find new ways to grow
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 4.6 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
ADT is trading at $7.37 per share, or 7.8x forward P/E. If you’re considering ADT for your portfolio, see our FREE research report to learn more.
Purple (PRPL)
Market Cap: $24.29 million
Founded by two brothers, Purple (NASDAQ: PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Do We Steer Clear of PRPL?
- Annual revenue declines of 9.1% over the last five years indicate problems with its market positioning
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Purple’s stock price of $5.70 implies a valuation ratio of 13x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including PRPL in your portfolio.
Frontier (ULCC)
Market Cap: $1.33 billion
Recognizable for the colorful animals adorning each aircraft tail, Frontier Group Holdings (NASDAQ: ULCC) is an ultra low-cost airline that provides budget-friendly flights throughout the United States and select international destinations in the Americas.
Why Do We Pass on ULCC?
- Annual revenue growth of 8.2% over the last two years was below our standards for the consumer discretionary sector
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
At $5.79 per share, Frontier trades at 27.4x forward P/E. Check out our free in-depth research report to learn more about why ULCC doesn’t pass our bar.
Stocks We Like More
WHILE YOU’RE HERE: Top 9 Market-Beating Stocks. The best stocks don’t just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.
But our AI platform says the party isn’t over. Find out which 9 stocks made the cut this week — FREE. Get Our Top 9 Market-Beating Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.
