Over the last six months, Insteel’s shares have sunk to $33.13, producing a disappointing 10.3% loss - a stark contrast to the S&P 500’s 7.7% gain. This might have investors contemplating their next move.

Is now the time to buy Insteel, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Insteel Not Exciting?

Despite the more favorable entry price, we're cautious about Insteel. Here are three reasons you should be careful with IIIN 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 experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Insteel’s sales grew at a mediocre 6.5% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.

2. Free Cash Flow Margin Dropping

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.

As you can see below, Insteel’s margin dropped by 8.3 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Insteel’s free cash flow margin for the trailing 12 months was breakeven.

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, Insteel’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Insteel isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 12.3× forward P/E (or $33.13 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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