The past six months haven’t been great for American Outdoor Brands. It just made a new 52-week low of $6.67, and shareholders have lost 42.6% of their capital. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in American Outdoor Brands, or does it present a risk to 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 American Outdoor Brands Will Underperform?

Despite the more favorable entry price, we're cautious about American Outdoor Brands. Here are three reasons you should be careful with AOUT and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, American Outdoor Brands’s sales grew at a weak 2.6% compounded annual growth rate over the last five years. This was below our standards.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

American Outdoor Brands’s full-year EPS dropped 225%, or 34.3% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, American Outdoor Brands’s low margin of safety could leave its stock price susceptible to large downswings.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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, American Outdoor Brands’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We see the value of companies helping consumers, but in the case of American Outdoor Brands, we’re out. After the recent drawdown, the stock trades at 64.7× forward P/E (or $6.67 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of our all-time favorite software stocks.

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