President Trump ran on a message of making American great again, and on paper, he’s delivering the goods. Let’s aside the nuances that economic trends take years to develop, and that the benefits we’re enjoying are likely from “Obamanomics.” We’re inundated with stories of record-low unemployment and surging labor markets. If so, retail and entertainment stocks would seem like surefire bets.
Unfortunately, the implications from the job numbers are “fake news.” For example, rather than a robust consumer retail market, we’re seeing the exact opposite. Citing bullish trends in e-commerce and Amazon.com, Inc.’s (NASDAQ:AMZN) dominance are detracting arguments. An alarming number of reputable firms face bankruptcy risks. Even product makers who don’t operate brick-and-mortar stores are facing a severe revenue drought.
Consumers are either cutting back on spending or are extremely selective in what they procure. This dynamic does not appear to improve any time soon, which negatively affects entertainment stocks. For instance, while unemployment is low, and average wage growth has increased 12% over the past five years, cost of living expenses have accelerated faster.
The consumer price index for rent has jumped to an 18% gain in the aforementioned time period. And the average existing home sales price has gone up 11% in just this year alone! It’s no wonder, then, that entertainment stocks are surprising the bulls, particularly “Trumponomics” supporters.
While Americans want to vacation with their families, on a net basis, the consumer is not getting ahead. That’s going to be problematic for these three entertainment stocks, unless the situation changes dramatically.
Entertainment Stocks to Sell: Six Flags Entertainment Corp (SIX)
As one of the nation’s premiere entertainment stocks, hope was flying high for Six Flags Entertainment Corp (NYSE:SIX). I was previously bullish on SIX shares, and investors were rewarded with a 16% return in 2016. Also, the “Trump rally” was good for a 6% gain for the theme park between Nov. 8 until December end.
But this year, SIX stock hasn’t lived up to prior enthusiasm. On a year-to-date basis, Six Flags is slightly below parity. That’s not terrible, but it’s certainly not going to light up Wall Street, either. A big part of the problem is financial profitability. Annual revenues increased an average of 6% over the trailing three years. However, recent quarterly growth is flat. More critically, the margins are getting worse, and thus, the SIX earnings performance is suffering.
Based on the aforementioned economic details, it’s not surprising that entertainment stocks are hurting. Several Americans are foregoing any kind of discretionary or luxury purchases. Those that are going are clearly skimping where they can. Otherwise, we’d expect the profit margins for SIX to improve, not worsen.
The telltale warning is in the technical charts. SIX stock has always been a choppy affair, but this year has been particularly wild. The peak-to-trough share price margin is 9%, but as previously mentioned, SIX is flat. That’s a lot of work to go absolutely nowhere.
Entertainment Stocks to Sell: Walt Disney Co (DIS)
I’d be remiss if I failed to mention Walt Disney Co (NYSE:DIS) in a discussion about entertainment stocks. Although the iconic giant has an immeasurably large business portfolio, most kids will agree: DIS is synonymous with America’s love for theme parks and resorts.
Unfortunately, that love isn’t being felt where it matters most — on Wall Street. After getting off to a rip-roaring start, DIS stock fell significantly from this year’s highs. Much of the ugliness was attributed to worse-than-expected profitability declines for ESPN. On the other hand, its movie studio and theme park divisions exceeded forecasts.
While I’m not at all surprised about Walt Disney’s movie business — considering its Star Wars powerhouse franchise — I am worried about the theme parks. DIS increased its ticket prices, causing attendance to drop by 1%. However, revenues were up 5%, leading execs to say “they are comfortable trading smaller crowds for higher prices.”
I think DIS will eventually change their tune if the overall economic trend doesn’t reverse. Over the last five years, the producer price index for theme parks jumped 32%. Again, if wages are only increasing by 12%, there’s less consumer dollars to go around.
Disney stock may get away with overcharging their guests for a while, but at some point, the pricing becomes a liability.
Entertainment Stocks to Sell: International Speedway Corp (ISCA)
If entertainment stocks focused on theme park development was facing a headwind, then International Speedway Corp (NASDAQ:ISCA) might as well be in the middle of a hurricane.
Despite ISCA promoting the biggest racing events in the nation, including the storied Daytona 500, the company has failed to gain traction with investors.
The biggest challenge is attendance. The famous stock car racing organization NASCAR is a crowd favorite, and it has significantly improved its fan experience. Nevertheless, it has been for naught, to the chagrin of ISCA. NASCAR stopped providing attendance figures in 2012, and for good reason. According to Sports Illustrated‘s Eden Laase, “… at many races, empty seats can be found in abundance.” Needless to say, as the facilitator, ISCA needs to find human butts to fill those seats.
Sadly, the problem continues to get worse in other racing series. Once a proud motorsports championship, the open-wheel series Indycar is now just a shell of its former self. Attendance has nosedived by more than 53% over the last eight years. Again, that just kills ISCA stock. I openly wonder if Indycar may just become a one-race tournament, i.e., the Indianapolis 500. Watch any Indycar race — you have to squint to see the fans.
All this adds up to a really terrible investment in ISCA. I personally love motorsports so it pains me to say that. But at the end of the day, you’re either making money or you’re not.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.