Acadia Healthcare has had an impressive run over the past six months as its shares have beaten the S&P 500 by 30.5%. The stock now trades at $24.02, marking a 39.6% gain. This run-up might have investors contemplating their next move.
Is now the time to buy Acadia Healthcare, 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 Acadia Healthcare Will Underperform?
Despite the momentum, we're cautious about Acadia Healthcare. Here are three reasons there are better opportunities than ACHC and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Hospital Chains company because there’s a ceiling to what customers will pay.
Acadia Healthcare’s admissions came in at 51,959 in the latest quarter, and over the last two years, averaged 3.8% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Acadia Healthcare, its EPS declined by 6.7% annually over the last five years while its revenue grew by 9.6%. 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, Acadia Healthcare’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
Acadia Healthcare doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 15.3× forward P/E (or $24.02 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of our top software and edge computing picks.
Stocks We Would Buy Instead of Acadia Healthcare
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