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Far too often I find a stock that checks off a lot of boxes, but doesn't quite make the cut. It's always disappointing, but it's vital to stay disciplined. Indulging these temptations can easily kill your returns. It's not worth the risk.

Comtech Telecommunications Corp. (NASDAQ:CMTL) is one of those stocks that almost made the cut. CMTL designs, develops, produces & markets products, systems and services for telecommunications transmission, mobile data communications and radio frequency (RF) microwave amplifiers.

CMTL looks great from many angles:

  • Cash covers Total Liabilities

CMTL has a very strong balance sheet. Cash minus Total Liabilities make up 28% of CMTL's current market value and Current Assets minus Total Liabilities accounts for over 54%!

  • Shareholders' equity has grown by 625.85% over the past 10 years, with a median annual growth rate of 31.10%.

Management's job is to deliver value for shareholders and that's exactly what Comtech's management have done. Over the past 10 years, they've grown the business by a median annual growth rate of 38.24%, according to its free cash flow, and chose to reinvest that money into the business.

  • For every $100 spent, CMTL is generating $125.52 of cash

When I buy a stock, I like to think I'm providing capital to that company, so I want to make sure that it's being used well. This is my proof. Comtech is producing a 25.52% cash return on invested capital.

Here's the Problem

CMTL relies on U.S. government contracts for over 70% of its revenue. 55% of the 70% comes from the U.S. Army alone. This is extremely concerning because CMTL's success is highly dependent on winning contracts from what is arguably one customer.

Some might argue that this is OK and I would be inclined to agree if they had 10-year contracts or a high level of secured revenue. They don't. A contract worth 47% of revenue is expiring in January and they will have to compete in a bidding process to win it again.

This makes me nervous. The result of competitive tenders are generally hard to predict and on top of this, CMTL recently lost a contract to a bidder who was able to undercut them on price by 50%.

CMTL's future revenue streams are far from guaranteed and makes it far too risky of an investment for my liking.

Verdict

Investing in a stock is like buying a used car. That perfectly priced car might have a new paint job, no rust and low mileage, but at the end of the day, if it's gas tank has major issues, is it worth buying?

I would say no. There are better investments out there than CMTL. Stay disciplined and you'll reap the rewards.

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Disclosure: No positions

Source: Comtech Telecommunications: This Stock Makes Me Nervous