News

AT&T has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 25% and now trades at $26.99. This run-up might have investors contemplating their next move.

Is now the time to buy AT&T, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free .

We’re glad investors have benefited from the price increase, but we don't have much confidence in AT&T. Here are three reasons why you should be careful with T and a stock we'd rather own.

Why Do We Think AT&T Will Underperform?

Founded by Alexander Graham Bell, AT&T (NYSE:T) is a multinational telecomm conglomerate providing a range of communications and internet services.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, AT&T’s demand was weak and its revenue declined by 7.6% per year. This wasn’t a great result and signals it’s a low quality business.

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 AT&T, its EPS declined by 10.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

AT&T historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.4%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

Final Judgment

AT&T falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 12.3× forward price-to-earnings (or $26.99 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market .

Stocks We Would Buy Instead of AT&T

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Get started by checking out our Top 5 Growth Stocks for this month . This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

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