3 Reasons to Sell YETI and 1 Stock to Buy Instead

Over the past six months, YETI’s stock price fell to $32.80. Shareholders have lost 11.7% of their capital, which is disappointing considering the S&P 500 has climbed by 5.2%. This might have investors contemplating their next move.

Is now the time to buy YETI, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is YETI Not Exciting?

Even with the cheaper entry price, we don't have much confidence in YETI. Here are three reasons why we avoid YETI 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 have short-term success, but a top-tier one grows for years. Over the last five years, YETI grew its sales at a 14.5% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. 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 YETI’s revenue to rise by 3.2%, a deceleration versus its 14.5% annualized growth for the past five years. This projection doesn't excite us and implies its products and services will face some demand challenges.

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, YETI’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

YETI isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 12.2× forward P/E (or $32.80 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 suggest looking at the Amazon and PayPal of Latin America.

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