Over the past six months, Hudson Technologies’s shares (currently trading at $7.49) have posted a disappointing 7.6% loss, well below the S&P 500’s 10% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Hudson Technologies, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Hudson Technologies Not Exciting?

Even with the cheaper entry price, we're swiping left on Hudson Technologies for now. Here are three reasons you should be careful with HDSN and a stock we'd rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Hudson Technologies’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 9.9% over the last two years.

2. EPS Took a Dip Over the Last Two Years

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.

Sadly for Hudson Technologies, its EPS declined by more than its revenue over the last two years, dropping 35.2%. This tells us the company struggled to adjust to shrinking demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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, Hudson Technologies’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

Hudson Technologies’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 8.7× forward EV-to-EBITDA (or $7.49 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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