Shoals’s 12.5% return over the past six months has outpaced the S&P 500 by 6.1%, and its stock price has climbed to $9.95 per share. 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 Shoals, 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 Is Shoals Not Exciting?
We’re happy investors have made money, but we’re swiping left on Shoals for now. Here are three reasons you should be careful with SHLS, plus one stock we’d rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Shoals’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 6.2% over the last two years was well below its five-year trend. 
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, Shoals’s margin dropped by 7.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Shoals’s free cash flow margin for the trailing 12 months was negative 14.5%.
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).
Unfortunately, Shoals’s ROIC has decreased 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
Shoals isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 20.2× forward P/E (or $9.95 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
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