3 Reasons DOX is Risky and 1 Stock to Buy Instead

Over the past six months, Amdocs's shares (currently trading at $59.50) have posted a disappointing 8.6% loss, well below the S&P 500's 16.2% gain. This might have investors contemplating their next move.

Is now the time to buy Amdocs, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it's free.

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why DOX doesn't excite us, plus one stock we'd rather own.

Reviewing a company's long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Amdocs grew its sales at a sluggish 1.8% compounded annual growth rate. This was below our standards.

Forecasted revenues by Wall Street analysts signal a company's potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Amdocs's revenue to rise by 3.4%. While this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.

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).

Over the last few years, Amdocs's ROIC averaged 3 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

We cheer for all companies making their customers lives easier, but in the case of Amdocs, we'll be cheering from the sidelines. Following the recent decline, the stock trades at 7.5× forward P/E (or $59.50 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We'd suggest looking at the most dominant software business in the world.

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