Select Water Solutions currently trades at $20.23 and has been a dream stock for shareholders. It’s returned 290% since September 2021, blowing past the S&P 500’s 71.6% gain. The company has also beaten the index over the past six months as its stock price is up 38.5% thanks to its solid quarterly results.
Is there a buying opportunity in Select Water Solutions, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Select Water Solutions Not Exciting?
Despite the momentum, we’re passing on Select Water Solutions for now. Here are three reasons why WTTR doesn’t excite us, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
The size of the revenue base is a way to assess topline, and it tells an investor whether an Energy producer has crossed the line between being a more vulnerable commodity taker and a durable operating platform. Scaled businesses tend to produce and generate revenue from many wells, pads, takeaway routes, and geographies, not just a single field or drilling program.
Select Water Solutions’s $1.43 billion of revenue in the last year is pretty small for the industry, suggesting the company hasn’t hit a level of diversification where investors can sleep easy at night.
2. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
Select Water Solutions, which averaged 24.2% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Breakeven Free Cash Flow Limits Reinvestment Potential
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.
Select Water Solutions broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
Final Judgment
Select Water Solutions isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 34.9× forward P/E (or $20.23 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.
Stocks We Like More Than Select Water Solutions
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