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.
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.
Energizer (ENR)
Forward P/E Ratio: 5.8x
Masterminds behind the viral Energizer Bunny mascot, Energizer (NYSE: ENR) is one of the world's largest manufacturers of batteries.
Why Do We Avoid ENR?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- 9.3 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Energizer’s stock price of $19.79 implies a valuation ratio of 5.8x forward P/E. If you’re considering ENR for your portfolio, see our FREE research report to learn more.
European Wax Center (EWCZ)
Forward P/E Ratio: 5.7x
Founded by two siblings, European Wax Center (NASDAQ: EWCZ) is a beauty and waxing salon chain specializing in professional wax services and skincare products.
Why Do We Pass on EWCZ?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Earnings growth underperformed the sector average over the last four years as its EPS grew by just 4% annually
- Returns on capital are increasing as management makes relatively better investment decisions
At $3.61 per share, European Wax Center trades at 5.7x forward P/E. Read our free research report to see why you should think twice about including EWCZ in your portfolio.
Stifel (SF)
Forward P/E Ratio: 13.7x
Tracing its roots back to 1890 when the firm was established in St. Louis, Stifel Financial (NYSE: SF) is a financial services firm that provides wealth management, investment banking, and institutional brokerage services to individuals, corporations, and institutions.
Why Are We Hesitant About SF?
- Earnings per share lagged its peers over the last five years as they only grew by 9% annually
- 6.1% annual book value per share growth over the last two years was slower than its financials peers
Stifel is trading at $128.73 per share, or 13.7x forward P/E. Dive into our free research report to see why there are better opportunities than SF.
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