Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But increasing competition from AI-driven upstarts has tempered enthusiasm, limiting the industry’s gains to 1.5% over the past six months. This return lagged the S&P 500’s 5.1% climb.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one resilient services stock at the top of our wish list and two that may face trouble.
Two Business Services Stocks to Sell:
Driven Brands (DRVN)
Market Cap: $2.10 billion
With approximately 5,000 locations across 49 U.S. states and 13 other countries, Driven Brands (NASDAQ: DRVN) operates a network of automotive service centers offering maintenance, car washes, paint, collision repair, and glass services across North America.
Why Does DRVN Worry Us?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Negative free cash flow raises questions about the return timeline for its investments
- Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up
Driven Brands’s stock price of $13.03 implies a valuation ratio of 10.7x forward P/E. If you’re considering DRVN for your portfolio, see our FREE research report to learn more.
CTS (CTS)
Market Cap: $1.56 billion
With roots dating back to 1896 and a global manufacturing footprint, CTS (NYSE: CTS) designs and manufactures sensors, connectivity components, and actuators for aerospace, defense, industrial, medical, and transportation markets.
Why Are We Wary of CTS?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Flat earnings per share over the last two years underperformed the sector average
- Eroding returns on capital suggest its historical profit centers are aging
At $54.49 per share, CTS trades at 23.1x forward P/E. Dive into our free research report to see why there are better opportunities than CTS.
One Business Services Stock to Buy:
QuinStreet (QNST)
Market Cap: $706.7 million
Founded during the dot-com era in 1999 and specializing in high-intent consumer traffic, QuinStreet (NASDAQ: QNST) operates digital performance marketplaces that connect clients in financial and home services with consumers actively searching for their products.
Why Is QNST a Good Business?
- Impressive 41.8% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Earnings per share grew by 454% annually over the last two years and trumped its peers
- Improving returns on capital suggest its past investments are beginning to deliver value
QuinStreet is trading at $12.40 per share, or 8.1x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
High-Quality Stocks for All Market Conditions
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