Over the past six months, Dole has been a great trade, beating the S&P 500 by 11%. Its stock price has climbed to $15.35, representing a healthy 14% increase. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Dole, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Dole Will Underperform?
Despite the momentum, we're swiping left on Dole for now. Here are three reasons you should be careful with DOLE and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Dole’s sales grew at a sluggish 2% compounded annual growth rate over the last three years. This fell short of our benchmarks.
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.
Dole has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 8.1% gross margin over the last two years. That means Dole paid its suppliers a lot of money ($91.89 for every $100 in revenue) to run its business. 
3. Weak Operating Margin Could Cause Trouble
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
Dole’s operating margin has generally stayed the same over the last 12 months, averaging 2.6% over the last two years. This profitability was paltry for a consumer staples business and caused by its suboptimal cost structureand low gross margin.
Final Judgment
Dole doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 11.2× forward P/E (or $15.35 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. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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