3 Reasons POOL is Risky and 1 Stock to Buy Instead

Pool’s stock price has taken a beating over the past six months, shedding 20.4% of its value and falling to $253.97 per share. This might have investors contemplating their next move.

Is now the time to buy Pool, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Do We Think Pool Will Underperform?

Even with the cheaper entry price, we're cautious about Pool. Here are three reasons we avoid POOL and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

Investors interested in Specialized Consumer Services companies should track organic revenue in addition to reported revenue. This metric gives visibility into Pool’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Pool’s organic revenue averaged 3.4% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Pool might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

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 Pool’s revenue to rise by 3.1%. Although this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.

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. Over the last few years, Pool’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Pool doesn’t pass our quality test. After the recent drawdown, the stock trades at 22.2× forward P/E (or $253.97 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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