When Wall Street turns bearish on a stock, it’s worth paying attention. These calls stand out because analysts rarely issue grim ratings on companies for fear their firms will lose out in other business lines such as M&A advisory.
Accurately determining a company’s long-term prospects isn’t easy, especially when sentiment is weak. That’s where StockStory comes in - to help you find attractive investment candidates backed by unbiased research. That said, here are three stocks facing legitimate challenges and some alternatives worth exploring instead.
Applied Industrial (AIT)
Consensus Price Target: $351.17 (5.6% implied return)
Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE: AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Why Does AIT Worry Us?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Projected sales growth of 5.9% for the next 12 months suggests sluggish demand
- Earnings per share lagged its peers over the last two years as they only grew by 5.4% annually
At $332.55 per share, Applied Industrial trades at 28x forward P/E. Check out our free in-depth research report to learn more about why AIT doesn’t pass our bar.
Ryder (R)
Consensus Price Target: $281.56 (4.9% implied return)
As one of the first companies to introduce the idea of leasing trucks, Ryder (NYSE: R) provides rental vehicles to businesses and delivers packages directly to homes or businesses.
Why Are We Wary of R?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3% for the last two years
- High input costs result in an inferior gross margin of 19.7% that must be offset through higher volumes
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Ryder’s stock price of $268.34 implies a valuation ratio of 17.7x forward P/E. Read our free research report to see why you should think twice about including R in your portfolio.
Acadia Healthcare (ACHC)
Consensus Price Target: $30.29 (-2.8% implied return)
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 Do We Think ACHC Will Underperform?
- Underwhelming admissions over the past two years indicate demand is soft and that the company may need to revise its strategy
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 6.7% annually
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Acadia Healthcare is trading at $31.17 per share, or 20.9x forward P/E. If you’re considering ACHC for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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