What a brutal six months it’s been for Newmark. The stock has dropped 20.3% and now trades at $14.86, rattling many shareholders. This might have investors contemplating their next move.

Is there a buying opportunity in Newmark, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Newmark Will Underperform?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid NMRK and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Newmark grew its sales at a 11.6% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. Mediocre Free Cash Flow Margin 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.

Newmark has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.7%, below what we’d expect for a consumer discretionary business.

3. New Investments Bear Fruit as ROIC Jumps

We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.

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. Over the last few years, Newmark’s ROIC averaged 1.1 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Final Judgment

Newmark doesn’t pass our quality test. Following the recent decline, the stock trades at 7.6× forward P/E (or $14.86 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

Stocks We Would Buy Instead of Newmark

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