Value stocks typically trade at discounts to the broader market, offering patient investors the opportunity to buy businesses when they’re out of favor. The key risk, however, is that these stocks are usually cheap for a reason — five cents for a piece of fruit may seem like a great deal until you find out it’s rotten.
Identifying genuine bargains from value traps is something many investors struggle with, which is why we started StockStory - to help you find the best companies. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
Dropbox (DBX)
Forward P/S Ratio: 2.6x
Originally named after the founders' tendency to "drop" files into a shared folder, Dropbox (NASDAQ: DBX) provides a content collaboration platform that helps individuals and teams store, organize, share, and work on files from anywhere.
Why Do We Pass on DBX?
- Billings didn’t grow over the last year, suggesting the company struggled to sell its software and might have to lower prices to stimulate growth
- Sales are projected to be flat over the next 12 months and imply weak demand
- Operating margin expansion of 6.1 percentage points over the last year shows the company optimized its expenses
Dropbox’s stock price of $28.37 implies a valuation ratio of 2.6x forward price-to-sales. Read our free research report to see why you should think twice about including DBX in your portfolio.
Whirlpool (WHR)
Forward P/E Ratio: 10.8x
Credited with introducing the first automatic washing machine, Whirlpool (NYSE: WHR) is a manufacturer of a variety of home appliances.
Why Is WHR Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 5.8% annually over the last five years
- 5.4 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital on unfavorable terms if market conditions deteriorate
At $40.39 per share, Whirlpool trades at 10.8x forward P/E. Dive into our free research report to see why there are better opportunities than WHR.
WEX (WEX)
Forward P/E Ratio: 7.1x
Originally founded in 1983 as Wright Express to serve the fleet card market, WEX (NYSE: WEX) provides payment processing and business solutions across fleet management, employee benefits, and corporate payments sectors.
Why Do We Think Twice About WEX?
- Sales trends were unexciting over the last two years as its 2.1% annual growth was below the typical financials company
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 6% annually
WEX is trading at $142.59 per share, or 7.1x forward P/E. To fully understand why you should be careful with WEX, check out our full research report (it’s free).
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