STAAR Surgical has been on fire lately. In the past six months alone, the company’s stock price has rocketed 52.2%, reaching $26.75 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy STAAR Surgical, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think STAAR Surgical Will Underperform?
We’re happy investors have made money, but we're cautious about STAAR Surgical. Here are three reasons why STAA doesn't excite us and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Medical Devices & Supplies - Specialty companies. This metric excludes currency movements, which are outside of STAAR Surgical’s control and are not indicative of underlying demand.
Over the last two years, STAAR Surgical’s constant currency revenue averaged 10.8% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests STAAR Surgical might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. 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, STAAR Surgical’s margin dropped by 35.2 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s in the middle of a big investment cycle. STAAR Surgical’s free cash flow margin for the trailing 12 months was negative 19.5%.
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. Unfortunately, STAAR Surgical’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
STAAR Surgical falls short of our quality standards. After the recent surge, the stock trades at 129.3× forward P/E (or $26.75 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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