Over the past six months, Kforce’s stock price fell to $26.30. Shareholders have lost 19.9% of their capital, which is disappointing considering the S&P 500 has climbed by 7.3%. This might have investors contemplating their next move.

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

Despite the more favorable entry price, we don't have much confidence in Kforce. Here are three reasons there are better opportunities than KFRC and a stock we'd rather own.

1. Revenue Spiraling Downwards

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Kforce’s demand was weak and its revenue declined by 1% per year. This was below our standards and is a sign of poor business quality.

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 Kforce, its EPS declined by 5.7% 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. 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. Over the last few years, Kforce’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Kforce doesn’t pass our quality test. After the recent drawdown, the stock trades at 12.8× forward P/E (or $26.30 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.

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