Calavo currently trades at $25.38 per share and has shown little upside over the past six months, posting a small loss of 4.2%. The stock also fell short of the S&P 500’s 9.6% gain during that period.
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Why Do We Think Calavo Will Underperform?
We're swiping left on Calavo for now. Here are three reasons why CVGW doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
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. Calavo struggled to consistently generate demand over the last three years as its sales dropped at a 18.3% annual rate. This was below our standards and signals it’s a low quality business.
2. Fewer Distribution Channels Limit its Ceiling
With $648.4 million in revenue over the past 12 months, Calavo is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers.
3. Low Gross Margin Reveals Weak Structural Profitability
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
Calavo has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 10% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $89.97 went towards paying for raw materials, production of goods, transportation, and distribution. 
Final Judgment
Calavo doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 16.4× forward P/E (or $25.38 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.
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