The low valuation multiples for value stocks provide a margin of safety that growth stocks rarely offer. However, the challenge lies in determining whether these cheap assets are genuinely undervalued or simply on sale due to their potentially deteriorating business models.
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. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
Comcast (CMCSA)
Forward P/E Ratio: 7.5x
Formerly known as American Cable Systems, Comcast (NASDAQ: CMCSA) is a multinational telecommunications company offering a wide range of services.
Why Should You Sell CMCSA?
- Sluggish trends in its domestic broadband customers suggest customers aren’t adopting its solutions as quickly as the company hoped
- Estimated sales growth of 2.4% for the next 12 months is soft and implies weaker demand
- Underwhelming 8.6% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $33.60 per share, Comcast trades at 7.5x forward P/E. Read our free research report to see why you should think twice about including CMCSA in your portfolio.
Kyndryl (KD)
Forward P/E Ratio: 11.8x
Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE: KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.
Why Does KD Fall Short?
- Sales tumbled by 4.6% annually over the last five years, showing market trends are working against its favor during this cycle
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.4% for the last five years
- Negative returns on capital show that some of its growth strategies have backfired
Kyndryl’s stock price of $31.80 implies a valuation ratio of 11.8x forward P/E. Check out our free in-depth research report to learn more about why KD doesn’t pass our bar.
Ares Capital (ARCC)
Forward P/E Ratio: 11.1x
As one of the largest business development companies in the United States with over $20 billion in assets, Ares Capital (NASDAQ: ARCC) is a business development company that provides financing solutions to middle-market companies, primarily through direct loans and equity investments.
Why Do We Avoid ARCC?
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 3.6% annually while its revenue grew
Ares Capital is trading at $22.31 per share, or 11.1x forward P/E. If you’re considering ARCC for your portfolio, see our FREE research report to learn more.
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