Although Spectrum Brands (currently trading at $79.54 per share) has gained 7.1% over the last six months, it has trailed the S&P 500’s 16.6% return during that period. This might have investors contemplating their next move.
Is there a buying opportunity in Spectrum Brands, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Spectrum Brands Will Underperform?
We don’t have much confidence in Spectrum Brands. Here are three reasons you should be careful with SPB, plus one stock we’d rather own.
1. Core Business Falling Behind as Organic Sales Decline
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
Spectrum Brands’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 1.1% year on year. 
2. Projected Revenue Growth Shows Limited Upside
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 Spectrum Brands’s revenue to stall, close to its flat result for the past three years. This projection doesn’t excite us and suggests its newer products will not lead to better top-line performance yet.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Spectrum Brands historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
Final Judgment
Spectrum Brands doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 15.6× forward P/E (or $79.54 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our all-time favorite software stocks.
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