Levi's trades at $22.04 per share and has stayed right on track with the overall market, gaining 9% over the last six months. At the same time, the S&P 500 has returned 9.1%.
Is there a buying opportunity in Levi's, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Levi's Will Underperform?
We're sitting this one out for now. Here are three reasons you should be careful with LEVI and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
We can better understand Apparel and Accessories companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Levi’s control and are not indicative of underlying demand.
Over the last two years, Levi’s constant currency revenue averaged 5.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
Levi's has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8%, lousy for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
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).
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, Levi’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Levi's falls short of our quality standards. That said, the stock currently trades at 14.4× forward P/E (or $22.04 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Levi's
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