Over the last six months, Resideo’s shares have sunk to $17.21, producing a disappointing 5.2% loss - a stark contrast to the S&P 500’s 1.6% gain. This might have investors contemplating their next move.

Is now the time to buy Resideo, 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.

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why we avoid REZI and a stock we'd rather own.

Why Is Resideo Not Exciting?

Resideo Technologies, Inc. (NYSE: REZI) is a manufacturer and distributor of technology-driven products and solutions for home comfort, energy management, water management, and safety and security.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Resideo’s sales grew at a mediocre 6.3% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Resideo, its EPS declined by 5.4% annually over the last two years while its revenue grew by 3%. 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

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 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, Resideo’s ROIC averaged 2.6 percentage point decreases 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.

Final Judgment

Resideo isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 7.3× forward price-to-earnings (or $17.21 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Resideo

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