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.
Identifying genuine bargains from value traps is something many investors struggle with, which is why we started StockStory - to help you find the best companies. Keeping that in mind, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
Reynolds (REYN)
Forward P/E Ratio: 13.5x
Best known for its aluminum foil, Reynolds (NASDAQ:REYN) is a household products company whose products focus on food storage, cooking, and waste.
Why Do We Avoid REYN?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Estimated sales decline of 1.4% for the next 12 months implies an even more challenging demand environment
- 6.1 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
Reynolds is trading at $22.17 per share, or 13.5x forward P/E. Dive into our free research report to see why there are better opportunities than REYN.
Leidos (LDOS)
Forward P/E Ratio: 14.9x
Formed through the split of IT services company SAIC, Leidos (NYSE:LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.
Why Are We Cautious About LDOS?
- Estimated sales growth of 2.6% for the next 12 months implies demand will slow from its two-year trend
Leidos’s stock price of $164.61 implies a valuation ratio of 14.9x forward P/E. If you’re considering LDOS for your portfolio, see our FREE research report to learn more.
Interpublic Group (IPG)
Forward P/E Ratio: 9.6x
With a history dating back to 1902 and roots in the McCann-Erickson agency, Interpublic Group (NYSE:IPG) is a marketing and communications holding company that owns agencies specializing in advertising, media buying, public relations, and digital marketing services.
Why Is IPG Risky?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Sales are projected to be flat over the next 12 months and imply weak demand
- Free cash flow margin shrank by 17.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $26.30 per share, Interpublic Group trades at 9.6x forward P/E. Check out our free in-depth research report to learn more about why IPG doesn’t pass our bar.
Stocks We Like More
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