The S&P 500 (^GSPC) is often seen as a benchmark for strong businesses, but that doesn’t mean every stock is worth owning. Some companies face significant challenges, whether it’s stagnating growth, heavy debt, or disruptive new competitors.
Even among blue-chip stocks, not all investments are created equal - which is why we built StockStory to help you navigate the market. Keeping that in mind, here are three S&P 500 stocks to avoid and some better alternatives instead.
A. O. Smith (AOS)
Market Cap: $9.92 billion
Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE: AOS) manufactures water heating and treatment products for various industries.
Why Are We Wary of AOS?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 2.7% annually
- Eroding returns on capital suggest its historical profit centers are aging
At $70.14 per share, A. O. Smith trades at 17.9x forward P/E. To fully understand why you should be careful with AOS, check out our full research report (it’s free).
Allegion (ALLE)
Market Cap: $14.24 billion
Allegion plc (NYSE: ALLE) is a provider of security products and solutions that keep people and assets safe and secure in various environments.
Why Does ALLE Worry Us?
- 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 2.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Allegion’s stock price of $167 implies a valuation ratio of 20.5x forward P/E. If you’re considering ALLE for your portfolio, see our FREE research report to learn more.
Ball (BALL)
Market Cap: $15.88 billion
Started with a $200 loan in 1880, Ball (NYSE: BLL) manufactures aluminum packaging for beverages, personal care, and household products as well as aerospace systems and other technologies.
Why Should You Dump BALL?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Ball is trading at $57.20 per share, or 15.8x forward P/E. Read our free research report to see why you should think twice about including BALL in your portfolio.
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