7 Consumer Stocks You May Be Thinking of Buying But Shouldn't

7 Consumer Stocks You May Be Thinking of Buying But Shouldn't

Retail stocks have had a tough year, but a great week. Investors should be selective when deciding to chase the rally. The Invesco S&P 500 Equal Weight Consumer Discretionary ETF has gained nearly 3% this week, but is still down 2.8% year-to-date. The S&P 500 has gained 11%.

While some think the rally has legs, betting on the consumer doesn't seem like the safest choice. The headwinds facing the sector are obvious and not going away. The spike in oil prices has resulted in higher inflation and the potential for higher interest rates. Retail sales rose 4.9% year over year in April, but a big chunk of that increase was due to higher gasoline prices. Consumer sentiment has also tumbled, which could foreshadow problems in the months ahead.

Rather than searching for stocks to buy, we decided to look for ones to avoid. We turned to a screen of short ideas from Wolfe Research's chief investment strategist, Chris Senyek, which focused on companies in the bottom 20% of 'earnings quality.' Consumer names on that screen include Burlington Stores, Advance Auto Parts, DoorDash, and Choice Hotels International.

Senyek also screened for companies that look likely to cut their dividends. The list includes companies returning at least 80% of earnings or free cash flow as dividends, with net debt at least 3.5 times EBITDA, and a dividend yield of at least 3.5%. Consumer names on that screen include Nike, Kohl's, and Wendy's.

Sometimes, the combination of a tough consumer backdrop and company-specific problems is just too much to overcome.