Graco has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 9.7% to $87.93 per share while the index has gained 10.4%.
Is now the time to buy Graco, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.We're sitting this one out for now. Here are three reasons why you should be careful with GGG and a stock we'd rather own.
Why Is Graco Not Exciting?
Founded in 1926, Graco (NYSE:GGG) is an industrial company specializing in the development and manufacturing of fluid-handling systems and products.
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. Over the last five years, Graco grew its sales at a tepid 5.4% compounded annual growth rate. This was below our standard for the industrials sector. 
2. 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 typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, Graco’s ROIC averaged 4.1 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Graco’s revenue to rise by 4.4%. While this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.
Final Judgment
Graco isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 28.2× forward price-to-earnings (or $87.93 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at Cloudflare, one of our top software picks that could be a home run with edge computing.
Stocks We Would Buy Instead of Graco
With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.
Put yourself in the driver’s seat by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like Comfort Systems (+783% five-year return). Find your next big winner with StockStory today for free.