Knowles has had an impressive run over the past six months as its shares have beaten the S&P 500 by 23.3%. The stock now trades at $22.85, marking a 37.4% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Knowles, 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 for active Edge members.

Why Do We Think Knowles Will Underperform?

We’re happy investors have made money, but we're cautious about Knowles. Here are three reasons there are better opportunities than KN and a stock we'd rather own.

1. Revenue Spiraling Downwards

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Knowles’s demand was weak and its revenue declined by 3.7% per year. This wasn’t a great result and signals it’s a low quality business.

2. Fewer Distribution Channels Limit its Ceiling

With $573.5 million in revenue over the past 12 months, Knowles is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels.

3. Recent EPS Growth Below Our Standards

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.

Knowles’s EPS grew at an unimpressive 5.3% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 4% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

Final Judgment

Knowles falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 18.6× forward P/E (or $22.85 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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