Value investing has created more billionaires than any other strategy, like Warren Buffett, who built his fortune by purchasing wonderful businesses at reasonable prices. But these hidden gems are few and far between - many stocks that appear cheap often stay that way because they face structural issues.
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.
Lithia (LAD)
Forward P/E Ratio: 8.7x
With a strong presence in the Western US, Lithia Motors (NYSE: LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.
Why Do We Think Twice About LAD?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 15.6%
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Lithia’s stock price of $314.53 implies a valuation ratio of 8.7x forward P/E. If you’re considering LAD for your portfolio, see our FREE research report to learn more.
Carriage Services (CSV)
Forward P/E Ratio: 13.7x
Established in 1991, Carriage Services (NYSE: CSV) is a provider of funeral and cemetery services in the United States.
Why Are We Wary of CSV?
- 4.3% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.9%
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 2.3 percentage points over the next year
Carriage Services is trading at $45.07 per share, or 13.7x forward P/E. To fully understand why you should be careful with CSV, check out our full research report (it’s free for active Edge members).
Labcorp (LH)
Forward P/E Ratio: 14.7x
With over 600 million tests performed annually and involvement in 90% of FDA-approved drugs in 2023, Labcorp (NYSE: LH) provides laboratory testing services and drug development solutions to doctors, hospitals, pharmaceutical companies, and patients worldwide.
Why Is LH Not Exciting?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 12.3 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
At $252.33 per share, Labcorp trades at 14.7x forward P/E. If you’re considering LH for your portfolio, see our FREE research report to learn more.
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