The past six months have been a windfall for Select Water Solutions’s shareholders. The company’s stock price has jumped 75.4%, hitting $21.05 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Select Water Solutions, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Select Water Solutions Not Exciting?
We’re glad investors have benefited from the price increase, but we’re swiping left on Select Water Solutions for now. Here are three reasons you should be careful with WTTR, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
In Energy, scale separates fragile single-asset producers from platform-style businesses that generate revenue across entire basins and infrastructure networks.
Select Water Solutions’s $1.40 billion of revenue in the last year is pretty small for the industry, suggesting the company hasn’t hit a level of diversification where investors can sleep easy at night.
2. Low Gross Margin Reveals Weak Structural Profitability
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
Select Water Solutions, which averaged 23.5% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Breakeven Free Cash Flow Limits Reinvestment Potential
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.
Select Water Solutions broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
Final Judgment
Select Water Solutions’s business quality ultimately falls short of our standards. Following the recent surge, the stock trades at 38× forward P/E (or $21.05 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of our top software and edge computing picks.
Stocks We Would Buy Instead of Select Water Solutions
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