Over the past six months, Levi's has been a great trade, beating the S&P 500 by 6.6%. Its stock price has climbed to $20.40, representing a healthy 12% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Levi's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Levi's Will Underperform?

Despite the momentum, we're cautious about Levi's. Here are three reasons why you should be careful with LEVI and a stock we'd rather own.

1. Weak Constant Currency Growth Points to Soft Demand

Investors interested in Apparel and Accessories companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Levi’s control and are not indicative of underlying demand.

Over the last two years, Levi’s constant currency revenue averaged 3.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Projected Revenue Growth Is Slim

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 Levi’s revenue to rise by 2.6%. Although this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.

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. Unfortunately, Levi’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

We cheer for all companies serving everyday consumers, but in the case of Levi's, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 16.2× forward P/E (or $20.40 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 one of our top software and edge computing picks.

Stocks We Would Buy Instead of Levi's

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