Since August 2021, the S&P 500 has delivered a total return of 73.7%. But one standout stock has more than doubled the market - over the past five years, Covenant Logistics has surged 201% to $33.37 per share. Its momentum hasn’t stopped as it’s also gained 18.8% in the last six months, beating the S&P by 5.4%.
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 don’t have much confidence in Covenant Logistics. Here are three reasons why CVLG doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Covenant Logistics’s 6.2% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Covenant Logistics’s EPS grew at a weak 1.2% compounded annual growth rate over the last five years, lower than its 6.2% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
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).
Unfortunately, Covenant Logistics’s ROIC has decreased significantly over the last few years. 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 14.7× forward P/E (or $33.37 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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