Value investing has produced some of the world’s most famous investing billionaires, including Warren Buffett, David Einhorn, and Seth Klarman, who built their fortunes by purchasing wonderful businesses at reasonable prices. But these hidden gems are few and far between - many stocks that appear cheap often stay that way because they face structural issues.
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.
Newmark (NMRK)
Forward P/E Ratio: 8.4x
Founded in 1929, Newmark (NASDAQ: NMRK) provides commercial real estate services, including leasing advisory, global corporate services, investment sales and capital markets, property and facilities management, valuation and advisory, and consulting.
Why Should You Dump NMRK?
- 12.5% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Negative free cash flow raises questions about the return timeline for its investments
- Rising returns on capital show management is making relatively better investments
At $16.87 per share, Newmark trades at 8.4x forward P/E. Check out our free in-depth research report to learn more about why NMRK doesn’t pass our bar.
Invesco (IVZ)
Forward P/E Ratio: 10.3x
With roots dating back to 1935 when it pioneered the first mutual fund with an objective of capital growth, Invesco (NYSE: IVZ) is a global asset management firm that offers investment solutions across equities, fixed income, alternatives, and multi-asset strategies.
Why Is IVZ Risky?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Sales over the last five years were less profitable as its earnings per share fell by 1.1% annually while its revenue was flat
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Invesco is trading at $26.64 per share, or 10.3x forward P/E. To fully understand why you should be careful with IVZ, check out our full research report (it’s free).
Kroger (KR)
Forward P/E Ratio: 12.6x
With a sprawling network of over 2,400 locations offering digital pickup services, Kroger (NYSE: KR) operates supermarkets, pharmacies, and fuel centers across 35 states, offering customers groceries, household items, and private-label products.
Why Do We Avoid KR?
- Lack of new stores puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
- Widely-available products (and therefore stiff competition) result in an inferior gross margin of 23.8% that must be offset through higher volumes
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
Kroger’s stock price of $66.01 implies a valuation ratio of 12.6x forward P/E. Check out our free in-depth research report to learn more about why KR doesn’t pass our bar.
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