Quest Resource’s stock price has taken a beating over the past six months, shedding 44.3% of its value and falling to $1.23 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Quest Resource, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Quest Resource Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than QRHC and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Quest Resource’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2.4% over the last two years. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Quest Resource’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Quest Resource burned through $3.10 million of cash over the last year, and its $71.65 million of debt exceeds the $449,000 of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Quest Resource’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Quest Resource until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Quest Resource falls short of our quality standards. After the recent drawdown, the stock trades at 124× forward P/E (or $1.23 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
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