What a fantastic six months it’s been for Insteel. Shares of the company have skyrocketed 41.9%, hitting $37.21. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Insteel, 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 Insteel Will Underperform?

We’re happy investors have made money, but we're swiping left on Insteel for now. Here are three reasons why we avoid IIIN 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 put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Insteel grew its sales at a tepid 4.8% compounded annual growth rate. This fell short of our benchmark for the industrials sector.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Insteel, its EPS declined by more than its revenue over the last two years, dropping 44.9%. 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. Over the last few years, Insteel’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We see the value of companies helping their customers, but in the case of Insteel, we’re out. After the recent rally, the stock trades at 19× forward P/E (or $37.21 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.

Stocks We Like More Than Insteel

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