Shareholders of Clarus would probably like to forget the past six months even happened. The stock dropped 22.8% and now trades at $3.25. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Clarus, 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 Clarus Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Clarus. Here are three reasons why we avoid CLAR and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Clarus’s 2.9% annualized revenue growth over the last five years was weak. This was below our standards. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Clarus, its EPS declined by 16.5% annually over the last five years while its revenue grew by 2.9%. This tells us the company became less profitable on a per-share basis as it expanded.
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. Over the last few years, Clarus’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Clarus doesn’t pass our quality test. Following the recent decline, the stock trades at 8.2× forward EV-to-EBITDA (or $3.25 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at the most dominant software business in the world.
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