Value stocks typically trade at discounts to the broader market, offering patient investors the opportunity to buy businesses when they’re out of favor. The key risk, however, is that these stocks are usually cheap for a reason – five cents for a piece of fruit may seem like a great deal until you find out it’s rotten.
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 with poor fundamentals and some alternatives you should consider instead.
Foot Locker (FL)
Forward P/E Ratio: 8.9x
Known for store associates whose uniforms resemble those of referees, Foot Locker (NYSE: FL) is a specialty retailer that sells athletic footwear, clothing, and accessories.
Why Do We Pass on FL?
- Store closures reveal weak demand and a push toward operational efficiency
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $15.36 per share, Foot Locker trades at 8.9x forward price-to-earnings. If you’re considering FL for your portfolio, see our FREE research report to learn more.
ADT (ADT)
Forward P/E Ratio: 10.1x
Founded in 1874 and headquartered in Boca Raton, Florida, ADT (NYSE: ADT) is a provider of security, automation, and smart home solutions, offering comprehensive services for home and business protection.
Why Do We Steer Clear of ADT?
- Sluggish trends in its customers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
ADT is trading at $8.15 per share, or 10.1x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than ADT.
Acadia Healthcare (ACHC)
Forward P/E Ratio: 8.8x
With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ: ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.
Why Does ACHC Give Us Pause?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Underwhelming admissions over the past two years indicate demand is soft and that the company may need to revise its strategy
- Free cash flow margin shrank by 38.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Acadia Healthcare’s stock price of $29.70 implies a valuation ratio of 8.8x forward price-to-earnings. Read our free research report to see why you should think twice about including ACHC in your portfolio.
Stocks We Like More
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