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.

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. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.

Bath and Body Works (BBWI)

Forward P/E Ratio: 7.1x

Spun off from L Brands in 2020, Bath & Body Works (NYSE: BBWI) is a personal care and home fragrance retailer where consumers can find specialty shower gels, scented candles for the home, and lotions.

Why Are We Cautious About BBWI?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Sales are projected to tank by 1.7% over the next 12 months as its demand continues evaporating
3. Earnings growth over the last three years fell short of the peer group average as its EPS only increased by 4.5% annually

At $19.34 per share, Bath and Body Works trades at 7.1x forward P/E. Check out our free in-depth research report to learn more about why BBWI doesn’t pass our bar.

Alight (ALIT)

Forward P/E Ratio: 2.9x

Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.

Why Do We Think ALIT Will Underperform?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.8% annually over the last five years
2. Earnings per share have contracted by 19.5% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Alight is trading at $0.69 per share, or 2.9x forward P/E. Dive into our free research report to see why there are better opportunities than ALIT.

Sallie Mae (SLM)

Forward P/E Ratio: 8.5x

Originally created as a government-sponsored enterprise before privatizing in 2004, Sallie Mae (NASDAQ: SLM) is a financial services company that provides private education loans, savings products, and educational resources to help students and families pay for college.

Why Should You Dump SLM?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Earnings growth underperformed the sector average over the last five years as its EPS grew by just 2.6% annually

Sallie Mae’s stock price of $21.92 implies a valuation ratio of 8.5x forward P/E. If you’re considering SLM for your portfolio, see our FREE research report to learn more.

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