What a fantastic six months it’s been for Viavi Solutions. Shares of the company have skyrocketed 162%, hitting $47.46. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Viavi Solutions, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Viavi Solutions Not Exciting?

We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons we avoid VIAV, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Viavi Solutions’s 3.4% annualized revenue growth over the last five years was sluggish. This was below our standard for the industrials sector.

2. EPS Growth Has Stalled

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.

Viavi Solutions’s flat EPS over the last five years was below its 3.4% 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).

Over the last few years, Viavi Solutions’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Viavi Solutions’s business quality ultimately falls short of our standards. Following the recent surge, the stock trades at 41.2× forward P/E (or $47.46 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 stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.

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