The past six months have been a windfall for Covenant Logistics’s shareholders. The company’s stock price has jumped 98.9%, hitting $43.21 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Covenant Logistics, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Covenant Logistics Will Underperform?

Despite the momentum, we’re sitting this one out for now. Here are three reasons why CVLG doesn’t excite us, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Covenant Logistics grew its sales at a mediocre 7.2% compounded annual growth rate. This fell short of our benchmark for the industrials sector.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Covenant Logistics, its EPS declined by 15.7% annually over the last two years while its revenue grew by 3.8%. 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

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. Unfortunately, Covenant Logistics’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

Covenant Logistics falls short of our quality standards. After the recent rally, the stock trades at $43.21 per share (or a forward price-to-sales ratio of 0.9×). The market typically values companies like Covenant Logistics based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. Let us point you toward one of our top software and edge computing picks.

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