Covenant Logistics’s stock price has taken a beating over the past six months, shedding 28.6% of its value and falling to a new 52-week low of $18.31 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 Covenant Logistics, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Even though the stock has become cheaper, we don't have much confidence in Covenant Logistics. Here are three reasons why there are better opportunities than CVLG and a stock we'd rather own.

Why Do We Think Covenant Logistics Will Underperform?

Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ: CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Covenant Logistics’s sales grew at a tepid 5% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Covenant Logistics, its EPS declined by more than its revenue over the last two years, dropping 17.8%. This tells us the company struggled to adjust to shrinking demand.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Covenant Logistics’s margin dropped by 22.2 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Covenant Logistics’s free cash flow margin for the trailing 12 months was 1.7%.

Final Judgment

We see the value of companies helping their customers, but in the case of Covenant Logistics, we’re out. Following the recent decline, the stock trades at 7.8× forward price-to-earnings (or $18.31 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Covenant Logistics

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