What a brutal six months it’s been for Richardson Electronics. The stock has dropped 23.7% and now trades at $9.58, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Richardson Electronics, 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 Do We Think Richardson Electronics Will Underperform?
Even with the cheaper entry price, we're swiping left on Richardson Electronics for now. Here are three reasons we avoid RELL and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Richardson Electronics’s 6% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Richardson Electronics broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
3. New Investments Fail to Bear Fruit as ROIC Declines
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. Unfortunately, Richardson Electronics’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Richardson Electronics, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 243.8× forward P/E (or $9.58 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of Richardson Electronics
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