Even during a down period for the markets, American Outdoor Brands has gone against the grain, climbing to $12.94. Its shares have yielded a 31.1% return over the last six months, beating the S&P 500 by 33.4%. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in American Outdoor Brands, 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 American Outdoor Brands Will Underperform?

Despite the momentum, we're sitting this one out for now. Here are three reasons why we avoid AOUT 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. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, American Outdoor Brands’s 5.2% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the consumer discretionary sector.

2. Operating Losses Sound the Alarms

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

American Outdoor Brands’s operating margin has risen over the last 12 months, but it still averaged negative 3.9% over the last two years. This is due to its large expense base and inefficient cost structure.

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, American Outdoor Brands’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

We cheer for all companies serving everyday consumers, but in the case of American Outdoor Brands, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 24.5× forward P/E (or $12.94 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 suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Would Buy Instead of American Outdoor Brands

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