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.
Separating the winners from the value traps is a tough challenge, and that’s where StockStory comes in. Our job is to find you high-quality companies that will stand the test of time. Keeping that in mind, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
LKQ (LKQ)
Forward P/E Ratio: 8.5x
A global distributor of vehicle parts and accessories, LKQ (NASDAQ: LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.
Why Do We Avoid LKQ?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Free cash flow margin is forecasted to grow by 1.2 percentage points in the coming year, potentially giving the company more chips to play with
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
LKQ is trading at $26.26 per share, or 8.5x forward P/E. Check out our free in-depth research report to learn more about why LKQ doesn’t pass our bar.
Integer Holdings (ITGR)
Forward P/E Ratio: 14.3x
With its name reflecting the mathematical term for "whole" or "complete," Integer Holdings (NYSE: ITGR) is a medical device outsource manufacturer that produces components and systems for cardiac, vascular, neurological, and other medical applications.
Why Are We Hesitant About ITGR?
- Smaller revenue base of $1.86 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Projected sales are flat for the next 12 months, implying demand will slow from its two-year trend
- Low returns on capital reflect management’s struggle to allocate funds effectively
Integer Holdings’s stock price of $93.48 implies a valuation ratio of 14.3x forward P/E. If you’re considering ITGR for your portfolio, see our FREE research report to learn more.
Concentrix (CNXC)
Forward P/E Ratio: 2x
With a team of approximately 450,000 employees across 75 countries, Concentrix (NASDAQ: CNXC) designs and delivers customer experience solutions that help global brands manage their customer interactions across digital channels and contact centers.
Why Does CNXC Give Us Pause?
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 1.6% annually while its revenue grew
- Underwhelming 2.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $22.68 per share, Concentrix trades at 2x forward P/E. To fully understand why you should be careful with CNXC, check out our full research report (it’s free).
Stocks We Like More
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