Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry’s 2.7% return has trailed the S&P 500 by 10.3 percentage points.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three services stocks that may face trouble.
CTS (CTS)
Market Cap: $1.19 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 Hesitant About CTS?
- Annual sales declines of 3.3% for the past two years show its products and services struggled to connect with the market during this cycle
- Subscale operations are evident in its revenue base of $531.5 million, meaning it has fewer distribution channels than its larger rivals
- Earnings per share have dipped by 3.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term
CTS is trading at $41.07 per share, or 17.9x forward P/E. To fully understand why you should be careful with CTS, check out our full research report (it’s free for active Edge members).
Verisk (VRSK)
Market Cap: $30.54 billion
Processing over 2.8 billion insurance transaction records annually through one of the world's largest private databases, Verisk Analytics (NASDAQ: VRSK) provides data, analytics, and technology solutions that help insurance companies assess risk, detect fraud, and make better business decisions.
Why Does VRSK Give Us Pause?
- Annual revenue growth of 2% over the last five years was below our standards for the business services sector
- Earnings per share lagged its peers over the last five years as they only grew by 7.2% annually
At $219.16 per share, Verisk trades at 29.4x forward P/E. Dive into our free research report to see why there are better opportunities than VRSK.
Ziff Davis (ZD)
Market Cap: $1.18 billion
Originally a pioneering technology publisher founded in 1927 that became famous for PC Magazine, Ziff Davis (NASDAQ: ZD) operates a portfolio of digital media brands and subscription services across technology, shopping, gaming, healthcare, and cybersecurity markets.
Why Should You Dump ZD?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Sales over the last five years were less profitable as its earnings per share fell by 2.2% annually while its revenue was flat
- Free cash flow margin dropped by 14.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Ziff Davis’s stock price of $29.77 implies a valuation ratio of 4.2x forward P/E. Check out our free in-depth research report to learn more about why ZD doesn’t pass our bar.
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