Over the last six months, Pool’s shares have sunk to $320.55, producing a disappointing 12% loss - a stark contrast to the S&P 500’s 16% gain. This might have investors contemplating their next move.

Is now the time to buy Pool, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Pool Will Underperform?

Even though the stock has become cheaper, we're swiping left on Pool for now. Here are three reasons why POOL doesn't excite us and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

We can better understand Specialized Consumer Services companies by analyzing their organic revenue. This metric gives visibility into Pool’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Pool’s organic revenue averaged 4.7% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Pool might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Pool’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 8.2% for the last 12 months will decrease to 7.8%.

3. 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. Unfortunately, Pool’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We see the value of companies helping consumers, but in the case of Pool, we’re out. After the recent drawdown, the stock trades at 28.2× forward P/E (or $320.55 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. Let us point you toward the most dominant software business in the world.

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