Spectrum Brands has had an impressive run over the past six months as its shares have beaten the S&P 500 by 37.4%. The stock now trades at $75.37, marking a 38.4% gain. 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 Spectrum Brands, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Spectrum Brands Will Underperform?
We’re happy investors have made money, but we're swiping left on Spectrum Brands for now. Here are three reasons you should be careful with SPB and a stock we'd rather own.
1. Core Business Falling Behind as Organic Sales Decline
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
Spectrum Brands’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 2% year on year. 
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 Spectrum Brands’s revenue to rise by 2.4%. Although this projection suggests its newer products will catalyze better top-line performance, it is still below average for the sector.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Spectrum Brands historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.9%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
Final Judgment
We see the value of companies helping consumers, but in the case of Spectrum Brands, we’re out. With its shares outperforming the market lately, the stock trades at 16.8× forward P/E (or $75.37 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at the most dominant software business in the world.
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