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.
This distinction between true value and value traps can challenge even the most skilled investors. Luckily for you, we started StockStory to help you uncover exceptional companies. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
Teradata (TDC)
Forward P/S Ratio: 1.2x
Pioneering data warehousing technology in the 1980s before "big data" was a common term, Teradata (NYSE: TDC) provides cloud-based data analytics and AI platforms that help large enterprises integrate, analyze, and leverage their data across multiple environments.
Why Do We Steer Clear of TDC?
- Offerings couldn’t generate interest over the last year as its billings have averaged 6.2% declines
- Projected sales decline of 2.5% over the next 12 months indicates demand will continue deteriorating
- Sky-high servicing costs result in an inferior gross margin of 59.3% that must be offset through increased usage
Teradata is trading at $21.18 per share, or 1.2x forward price-to-sales. To fully understand why you should be careful with TDC, check out our full research report (it’s free for active Edge members).
Strategic Education (STRA)
Forward P/E Ratio: 13.5x
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ: STRA) is a career-focused higher education provider.
Why Are We Out on STRA?
- Demand for its offerings was relatively low as its number of domestic students has underwhelmed
- Earnings per share fell by 7.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- ROIC of 3.7% reflects management’s challenges in identifying attractive investment opportunities
At $79.22 per share, Strategic Education trades at 13.5x forward P/E. Read our free research report to see why you should think twice about including STRA in your portfolio.
Taylor Morrison Home (TMHC)
Forward P/E Ratio: 9.2x
Named “America’s Most Trusted Home Builder” in 2019, Taylor Morrison Home (NYSE: TMHC) builds single family homes and communities across the United States.
Why Does TMHC Give Us Pause?
- Backlog has dropped by 14.5% on average over the past two years, suggesting it’s losing orders as competition picks up
- Estimated sales decline of 13.6% for the next 12 months implies a challenging demand environment
- Earnings per share lagged its peers over the last two years as they only grew by 2.6% annually
Taylor Morrison Home’s stock price of $59.14 implies a valuation ratio of 9.2x forward P/E. If you’re considering TMHC for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
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