Sinclair has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 5.7% to $15.25 per share while the index has gained 10.1%.

Is there a buying opportunity in Sinclair, 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 Sinclair Will Underperform?

We're cautious about Sinclair. Here are three reasons there are better opportunities than SBGI and a stock we'd rather own.

1. Revenue Spiraling Downwards

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Sinclair’s demand was weak and its revenue declined by 11.2% per year. This wasn’t a great result and signals it’s a low quality business.

2. 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. Unfortunately, Sinclair’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Sinclair’s $4.32 billion of debt exceeds the $526 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $645 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Sinclair could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Sinclair can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Sinclair doesn’t pass our quality test. That said, the stock currently trades at 8.7× forward EV-to-EBITDA (or $15.25 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward the most dominant software business in the world.

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