Over the last six months, Clarus’s shares have sunk to $3.52, producing a disappointing 8.1% loss - a stark contrast to the S&P 500’s 18.4% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Clarus, 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.

Why Do We Think Clarus Will Underperform?

Even with the cheaper entry price, we don't have much confidence in Clarus. Here are three reasons there are better opportunities than CLAR and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Clarus grew its sales at a sluggish 4.4% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector.

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.

Over the last two years, Clarus’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3.1%, meaning it lit $3.05 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 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. Over the last few years, Clarus’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

We cheer for all companies serving everyday consumers, but in the case of Clarus, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 21.4× forward P/E (or $3.52 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our top digital advertising picks.

Stocks We Would Buy Instead of Clarus

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