Over the past six months, Proto Labs has been a great trade, beating the S&P 500 by 33.6%. Its stock price has climbed to $67.52, representing a healthy 39.6% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Proto Labs, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Despite the momentum, we're sitting this one out for now. Here are three reasons you should be careful with PRLB and a stock we'd rather own.

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. Unfortunately, Proto Labs’s 4.2% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector.

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Proto Labs, its EPS declined by 7% annually over the last five years while its revenue grew by 4.2%. This tells us the company became less profitable on a per-share basis as it expanded.

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Proto Labs’s five-year average ROIC was negative 1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.

We see the value of companies helping their customers, but in the case of Proto Labs, we’re out. With its shares beating the market recently, the stock trades at 37.6× forward P/E (or $67.52 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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