The low valuation multiples for value stocks provide a margin of safety that growth stocks rarely offer. However, the challenge lies in determining whether these cheap assets are genuinely undervalued or simply on sale due to their potentially deteriorating business models.
This distinction between true value and value traps can challenge even the most skilled investors. Luckily for you, we started StockStory to help you uncover exceptional companies. Keeping that in mind, here are three value stocks climbing an uphill battle and some other investments you should look into instead.
Macy's (M)
Forward P/E Ratio: 6.3x
With a storied history that began with its 1858 founding, Macy’s (NYSE:M) is a department store chain that sells clothing, cosmetics, accessories, and home goods.
Why Should You Sell M?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Subpar operating margin of 2.3% constrains its ability to invest in process improvements or effectively respond to new competitive threats
Macy's is trading at $12.18 per share, or 6.3x forward P/E. Read our free research report to see why you should think twice about including M in your portfolio.
D.R. Horton (DHI)
Forward P/E Ratio: 13.2x
One of the largest homebuilding companies in the U.S., D.R. Horton (NYSE:DHI) builds a variety of new construction homes across multiple markets.
Why Do We Think Twice About DHI?
- Backlog has dropped by 17% on average over the past two years, suggesting it’s losing orders as competition picks up
- Earnings per share have contracted by 5.8% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Eroding returns on capital suggest its historical profit centers are aging
At $157.29 per share, D.R. Horton trades at 13.2x forward P/E. If you’re considering DHI for your portfolio, see our FREE research report to learn more.
Teleflex (TFX)
Forward P/E Ratio: 8.8x
With a portfolio spanning from vascular access catheters to minimally invasive surgical tools, Teleflex (NYSE:TFX) designs, manufactures, and supplies single-use medical devices used in critical care and surgical procedures across hospitals worldwide.
Why Are We Wary of TFX?
- 2.4% annual revenue growth over the last two years was slower than its healthcare peers
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Teleflex’s stock price of $118.69 implies a valuation ratio of 8.8x forward P/E. Check out our free in-depth research report to learn more about why TFX doesn’t pass our bar.
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