Perma-Fix has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6.2%. The stock now trades at $10.54, marking a 12.4% gain. This performance may have investors wondering how to approach the situation.

Is now the time to buy Perma-Fix, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

We’re happy investors have made money, but we don't have much confidence in Perma-Fix. Here are three reasons why there are better opportunities than PESI and a stock we'd rather own.

Why Do We Think Perma-Fix Will Underperform?

Tackling hazardous waste challenges since 1990, Perma-Fix (NASDAQ:PESI) provides environmental waste treatment services.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Perma-Fix grew its sales at a weak 1.2% compounded annual growth rate. This was below our standards.

2. Cash Burn Ignites Concerns

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.

Perma-Fix’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2.3%, meaning it lit $2.32 of cash on fire for every $100 in revenue.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, Perma-Fix’s ROIC has decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Perma-Fix, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at $10.54 per share (or 1.9× forward price-to-sales). The market typically values companies like Perma-Fix based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at Wingstop, a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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