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.
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. Keeping that in mind, here are three value stocks with little support and some other investments you should consider instead.
Dollar Tree (DLTR)
Forward P/E Ratio: 10.9x
A treasure hunt because there’s no guarantee of consistent product selection, Dollar Tree (NASDAQ: DLTR) is a discount retailer that sells general merchandise and select packaged food at extremely low prices.
Why Are We Cautious About DLTR?
- Sizable revenue base leads to growth challenges as its 5.8% annual revenue increases over the last five years fell short of other consumer retail companies
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $64.85 per share, Dollar Tree trades at 10.9x forward price-to-earnings. If you’re considering DLTR for your portfolio, see our FREE research report to learn more.
Royalty Pharma (RPRX)
Forward P/E Ratio: 6.9x
Pioneering a unique business model in the pharmaceutical industry since 1996, Royalty Pharma (NASDAQ: RPRX) acquires rights to receive portions of sales from successful biopharmaceutical products, providing funding to drug developers without conducting research itself.
Why Is RPRX Not Exciting?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Smaller revenue base of $2.26 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 18.1 percentage points
Royalty Pharma’s stock price of $33.45 implies a valuation ratio of 6.9x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than RPRX.
ScanSource (SCSC)
Forward P/E Ratio: 10.1x
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.
Why Do We Pass on SCSC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.4% annually over the last two years
- Sales were less profitable over the last two years as its earnings per share fell by 11.7% annually, worse than its revenue declines
- Underwhelming 7.8% return on capital reflects management’s difficulties in finding profitable growth opportunities
ScanSource is trading at $37.54 per share, or 10.1x forward price-to-earnings. If you’re considering SCSC for your portfolio, see our FREE research report to learn more.
Stocks We Like More
With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.
Put yourself in the driver’s seat by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.
