3 Reasons to Sell GGG and 1 Stock to Buy Instead

Graco currently trades at $84.54 per share and has shown little upside over the past six months, posting a small loss of 0.8%. The stock also fell short of the S&P 500’s 9.7% gain during that period.

Is there a buying opportunity in Graco, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Graco Not Exciting?

We're sitting this one out for now. Here are three reasons we avoid GGG and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

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. Unfortunately, Graco’s 6.9% annualized revenue growth over the last five years was mediocre. This was below our standard for the industrials sector.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Graco, its EPS declined by 1.4% annually over the last two years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Graco’s low margin of safety could leave its stock price susceptible to large downswings.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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, Graco’s ROIC has decreased 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

Graco isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 27.4× forward P/E (or $84.54 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.

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