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Stock Strategist

Five Consumer Stocks to Avoid

We screened for overvalued consumer firms amid a continued slump in consumer spending.

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As you've likely seen in the news, U.S. gross domestic production declined 1% in the second quarter. Many commentators believe that, with the pace of decline decelerating, the worst of the recession may be behind us. That remains to be seen. However, one area of the GDP report showing persistent sluggishness was consumer spending, which declined 1.2% in the second quarter after increasing 0.6% in the first quarter. This continuing, declining trend is worrisome, because the strength of any economic recovery is going to rely heavily on the U.S. consumer.

We looked at this data and began to wonder which, if any, of the consumer services names that we cover here at Morningstar are trading at a significant premium to our fair value estimate. In other words, are there any consumer stocks that are overvalued? Given the apparent weakening of consumer spending, and increasing unemployment rates, now is probably not the best time to own an overvalued company reliant upon consumers opening their wallets wider.

Mike Taggart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.