Shareholders of Newmark would probably like to forget the past six months even happened. The stock dropped 23.8% and now trades at $11.17. This might have investors contemplating their next move.
Is now the time to buy Newmark, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Newmark Will Underperform?
Even though the stock has become cheaper, we're cautious about Newmark. Here are three reasons why there are better opportunities than NMRK 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 put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Newmark’s 4.9% annualized revenue growth over the last five years was sluggish. This was below our standard for the consumer discretionary sector. 
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the last two years, Newmark’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2.4%, meaning it lit $2.44 of cash on fire for every $100 in revenue.
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).
Newmark historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.1%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Newmark, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 8× forward P/E (or $11.17 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward the most dominant software business in the world.
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