Three Reasons Why AVO is Risky and One Stock to Buy Instead

January 10, 2025 at 04:06 AM EST

AVO Cover Image

Mission Produce has had an impressive run over the past six months as its shares have beaten the S&P 500 by 23.8%. The stock now trades at $12.30, marking a 28.5% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Mission Produce, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

We’re glad investors have benefited from the price increase, but we're cautious about Mission Produce. Here are three reasons why there are better opportunities than AVO and a stock we'd rather own.

Why Do We Think Mission Produce Will Underperform?

Founded in 1983 in California, Mission Produce (NASDAQ: AVO) grows, packages, and distributes avocados.

1. Less Negotiating Power with Suppliers

Mission Produce is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage. On the other hand, it can grow faster because it’s working from a smaller revenue base and has a longer runway of untapped store chains to sell into.

Mission Produce Trailing 12-Month Revenue

2. Low Gross Margin Reveals Weak Structural Profitability

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Mission Produce has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 10.8% gross margin over the last two years. That means Mission Produce paid its suppliers a lot of money ($89.23 for every $100 in revenue) to run its business. Mission Produce Trailing 12-Month Gross Margin

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Mission Produce historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.5%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.

Mission Produce Trailing 12-Month Return On Invested Capital

Final Judgment

Mission Produce doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 28.3× forward price-to-earnings (or $12.30 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at The Trade Desk, the nucleus of digital advertising.

Stocks We Would Buy Instead of Mission Produce

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market to cap off the year - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like Comfort Systems (+783% five-year return). Find your next big winner with StockStory today for free.

Symbol	Price	Change (%)
AMZN	213.04	-1.43 (-0.67%)
AAPL	252.29	+4.84 (1.96%)
AMD	233.08	-1.48 (-0.63%)
BAC	51.28	+0.84 (1.67%)
GOOG	253.79	+1.91 (0.76%)
META	716.91	+4.84 (0.68%)
MSFT	513.58	+1.97 (0.39%)
NVDA	183.16	+1.35 (0.74%)
ORCL	291.31	-21.69 (-6.93%)
TSLA	439.31	+10.56 (2.46%)

Symbol

Price

Change (%)

AMZN

213.04

-1.43 (-0.67%)

AAPL

252.29

+4.84 (1.96%)

AMD

233.08

-1.48 (-0.63%)

BAC

51.28

+0.84 (1.67%)

GOOG

253.79

+1.91 (0.76%)

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