Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry’s return was flat - just like the S&P 500.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. With that said, here are three services stocks we’re steering clear of.
CompoSecure (CMPO)
Market Cap: $1.18 billion
Pioneer of the luxury metal credit card that's in the wallets of affluent consumers worldwide, CompoSecure (NASDAQ: CMPO) designs and manufactures premium metal payment cards and secure authentication solutions for financial institutions and digital asset storage.
Why Are We Hesitant About CMPO?
- Revenue base of $420.6 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Efficiency has decreased over the last four years as its adjusted operating margin fell by 4.8 percentage points
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
CompoSecure’s stock price of $11.80 implies a valuation ratio of 10.7x forward price-to-earnings. To fully understand why you should be careful with CMPO, check out our full research report (it’s free).
Exponent (EXPO)
Market Cap: $4.08 billion
With a team of over 800 consultants holding advanced degrees in 90+ technical disciplines, Exponent (NASDAQ: EXPO) is a science and engineering consulting firm that investigates complex problems and provides expert analysis for clients across various industries.
Why Are We Wary of EXPO?
- Smaller revenue base of $518.5 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 5.4% annually
- Diminishing returns on capital suggest its earlier profit pools are drying up
Exponent is trading at $80.19 per share, or 38.3x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than EXPO.
Interpublic Group (IPG)
Market Cap: $9.66 billion
With a history dating back to 1902 and roots in the McCann-Erickson agency, Interpublic Group (NYSE: IPG) is a marketing and communications holding company that owns agencies specializing in advertising, media buying, public relations, and digital marketing services.
Why Do We Pass on IPG?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Projected sales decline of 5.6% over the next 12 months indicates demand will continue deteriorating
- Free cash flow margin shrank by 10.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $25.98 per share, Interpublic Group trades at 9.8x forward price-to-earnings. Check out our free in-depth research report to learn more about why IPG doesn’t pass our bar.
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 6 Stocks for this week. 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.
