Somnigroup currently trades at $58.27 and has been a dream stock for shareholders. It’s returned 467% since April 2020, blowing past the S&P 500’s 90.9% gain. The company has also beaten the index over the past six months as its stock price is up 17%.

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We’re happy investors have made money, but we're swiping left on Somnigroup for now. Here are three reasons why SGI doesn't excite us and a stock we'd rather own.

Why Is Somnigroup Not Exciting?

Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE:SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products

1. Long-Term Revenue Growth Disappoints

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. Unfortunately, Somnigroup’s 9.7% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the consumer discretionary sector.

2. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Somnigroup’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 11.5% for the last 12 months will decrease to 7%.

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

Final Judgment

Somnigroup isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 10.3× forward EV-to-EBITDA (or $58.27 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy .