Howard Hughes Holdings has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 15.9% to $80.30 per share while the index has gained 11.5%.

Is there a buying opportunity in Howard Hughes Holdings, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Do We Think Howard Hughes Holdings Will Underperform?

We're cautious about Howard Hughes Holdings. Here are three reasons there are better opportunities than HHH and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Howard Hughes Holdings grew its sales at a 17.6% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

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.

Howard Hughes Holdings has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.4%, lousy for a consumer discretionary business.

3. New Investments Bear Fruit as ROIC Jumps

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Fortunately, Howard Hughes Holdings’s ROIC averaged 2.8 percentage point increases over the last few years. This is a good sign, and we hope the company can continue improving.

Final Judgment

Howard Hughes Holdings falls short of our quality standards. That said, the stock currently trades at $80.30 per share (or a forward price-to-sales ratio of 2.2×). The market typically values companies like Howard Hughes Holdings based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.

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