Vicor has been on fire lately. In the past six months alone, the company’s stock price has rocketed 62.9%, reaching $56.80 per share. 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 Vicor, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

We’re glad investors have benefited from the price increase, but we're cautious about Vicor. Here are three reasons why we avoid VICR and a stock we'd rather own.

Why Is Vicor Not Exciting?

Founded by a researcher at the Massachusetts Institute of Technology, Vicor (NASDAQ:VICR) provides electrical power conversion and delivery products for a range of industries.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Over the last five years, Vicor grew its sales at a tepid 5.6% compounded annual growth rate. This was below our standard for the industrials sector.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Vicor’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Final Judgment

Vicor isn’t a terrible business, but it doesn’t pass our bar. After the recent rally, the stock trades at 65.8× forward price-to-earnings (or $56.80 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere. We’d suggest looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.

Stocks We Like More Than Vicor

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