Shareholders of Shoals would probably like to forget the past six months even happened. The stock dropped 29.7% and now trades at $6.99. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Shoals, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Shoals Not Exciting?
Even though the stock has become cheaper, we're swiping left on Shoals for now. Here are three reasons why SHLS doesn't excite us and a stock we'd rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Shoals’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.4% over the last two years. 
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 Shoals, its EPS declined by more than its revenue over the last two years, dropping 23.6%. This tells us the company struggled to adjust to shrinking demand.
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, Shoals’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
Shoals isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 17.4× forward P/E (or $6.99 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the Amazon and PayPal of Latin America.
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