Cognex has had an impressive run over the past six months as its shares have beaten the S&P 500 by 20.7%. The stock now trades at $53.89, marking a 23.2% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Cognex, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Cognex Not Exciting?

Despite the momentum, we don't have much confidence in Cognex. Here are three reasons there are better opportunities than CGNX and a stock we'd rather own.

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. Regrettably, Cognex’s sales grew at a mediocre 4.2% compounded annual growth rate over the last five years. This fell short of our benchmark for the business services sector.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Cognex, its EPS declined by 1.3% annually over the last five years while its revenue grew by 4.2%. 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, Cognex’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.

Final Judgment

Cognex isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 43× forward P/E (or $53.89 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.

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