STAAR Surgical has had an impressive run over the past six months as its shares have beaten the S&P 500 by 7.7%. The stock now trades at $27.81, marking a 16.2% gain. 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 STAAR Surgical, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think STAAR Surgical Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons why there are better opportunities than STAA, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched historical view may miss recent innovations or disruptive industry trends. STAAR Surgical’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.7% over the last two years. 
2. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, STAAR Surgical’s margin dropped by 26.6 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. STAAR Surgical’s free cash flow margin for the trailing 12 months was negative 18.9%.
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.
Over the last few years, STAAR Surgical’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
STAAR Surgical doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 37× forward P/E (or $27.81 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
Stocks We Like More Than STAAR Surgical
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