3 Reasons to Sell IIIN and 1 Stock to Buy Instead

Over the last six months, Insteel’s shares have sunk to $32.17, producing a disappointing 13.5% loss - a stark contrast to the S&P 500’s 11.7% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Insteel, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Is Insteel Not Exciting?

Despite the more favorable entry price, we don't have much confidence in Insteel. Here are three reasons why IIIN doesn't excite us 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Insteel’s 6.5% annualized revenue growth over the last five years was mediocre. This was below our standard 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, Insteel’s margin dropped by 5.9 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Insteel’s free cash flow margin for the trailing 12 months was 2.9%.

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. Over the last few years, Insteel’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

Insteel isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 11× forward P/E (or $32.17 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.

Stocks We Would Buy Instead of Insteel

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