Over the last six months, Connection’s shares have sunk to $56.50, producing a disappointing 9.5% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Connection, 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 Connection Will Underperform?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons there are better opportunities than CNXN 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. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Connection’s sales grew at a sluggish 2.1% compounded annual growth rate over the last five years. This was below our standards.

2. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Connection’s EPS grew at a weak 3.3% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its flat revenue and tells us management responded to softer demand by adapting its cost structure.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Connection has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 3.3%, below what we’d expect for a business services business.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Connection, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 15× forward P/E (or $56.50 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 more timely opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Connection

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