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 – five cents for a piece of fruit may seem like a great deal until you find out it’s rotten.
Separating the winners from the value traps is a tough challenge, and that’s where StockStory comes in. Our job is to find you high-quality companies that will stand the test of time. Keeping that in mind, here are three value stocks climbing an uphill battle and some other investments you should look into instead.
Royal Caribbean (RCL)
Forward P/E Ratio: 16.2x
Established in 1968, Royal Caribbean Cruises (NYSE: RCL) is a global cruise vacation company renowned for its innovative and exciting cruise experiences.
Why Are We Wary of RCL?
- Annual sales growth of 9.7% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 7.1 percentage points over the next year
- Underwhelming -0.2% return on capital reflects management’s difficulties in finding profitable growth opportunities
Royal Caribbean’s stock price of $247.78 implies a valuation ratio of 16.2x forward P/E. Dive into our free research report to see why there are better opportunities than RCL.
Regal Rexnord (RRX)
Forward P/E Ratio: 14.3x
Headquartered in Milwaukee, Regal Rexnord (NYSE: RRX) provides power transmission and industrial automation products.
Why Does RRX Fall Short?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 5% annually while its revenue grew
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
At $144.34 per share, Regal Rexnord trades at 14.3x forward P/E. To fully understand why you should be careful with RRX, check out our full research report (it’s free).
Pfizer (PFE)
Forward P/E Ratio: 7.6x
With roots dating back to 1849 when two German immigrants opened a fine chemicals business in Brooklyn, Pfizer (NYSE: PFE) is a global biopharmaceutical company that discovers, develops, manufactures, and sells medicines and vaccines for a wide range of diseases and conditions.
Why Does PFE Give Us Pause?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Free cash flow margin shrank by 8.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital imply its previous profit engines are losing steam
Pfizer is trading at $22.90 per share, or 7.6x forward P/E. Check out our free in-depth research report to learn more about why PFE doesn’t pass our bar.
Stocks We Like More
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