Covenant Logistics currently trades at $28.57 and has been a dream stock for shareholders. It’s returned 219% since February 2021, tripling the S&P 500’s 73.7% gain. The company has also beaten the index over the past six months as its stock price is up 21%.
Is now the time to buy Covenant Logistics, 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 Do We Think Covenant Logistics Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Covenant Logistics. Here are three reasons you should be careful with CVLG and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Covenant Logistics grew its sales at a mediocre 6.8% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Covenant Logistics’s margin dropped by 7.1 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle. Covenant Logistics’s free cash flow margin for the trailing 12 months was breakeven.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
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, Covenant Logistics’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
Covenant Logistics falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 15.6× forward P/E (or $28.57 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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