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, and a low valuation can reflect underlying business challenges rather than a genuine bargain.

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.

Parsons (PSN)

Forward P/E Ratio: 14.6x

Delivering aerospace technology during the Cold War-era, Parsons (NYSE: PSN) offers engineering, construction, and cybersecurity solutions for the infrastructure and defense sectors.

Why Are We Hesitant About PSN?

1. New orders were hard to come by as its average backlog growth of 1.1% over the past two years underwhelmed
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4.5%
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Parsons’s stock price of $48.07 implies a valuation ratio of 14.6x forward P/E. If you’re considering PSN for your portfolio, see our FREE research report to learn more.

Kennametal (KMT)

Forward P/E Ratio: 8.5x

Involved in manufacturing hard tips of anti-tank projectiles in World War II, Kennametal (NYSE: KMT) is a provider of industrial materials and tools for various sectors.

Why Are We Cautious About KMT?

1. Annual revenue growth of 5.1% over the last five years was below our standards for the industrials sector
2. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
3. Free cash flow margin dropped by 7.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Kennametal is trading at $33.85 per share, or 8.5x forward P/E. Check out our free in-depth research report to learn more about why KMT doesn’t pass our bar.

LendingTree (TREE)

Forward EV/EBITDA Ratio: 5.1x

Using the same comparison model that revolutionized travel booking, LendingTree (NASDAQ: TREE) operates an online platform that connects consumers with financial service providers across mortgages, personal loans, credit cards, insurance, and other financial products.

Why Does TREE Worry Us?

1. Estimated sales growth of 7% for the next 12 months implies demand will slow from its three-year trend
2. Excessive marketing spend signals little organic demand and traction for its platform
3. Free cash flow margin was stuck in limbo over the last few years

At $31.80 per share, LendingTree trades at 5.1x forward EV/EBITDA. Read our free research report to see why you should think twice about including TREE in your portfolio.

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