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.
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 poor fundamentals and some alternatives you should consider instead.
American Eagle (AEO)
Forward P/E Ratio: 10x
With a heavy focus on denim, American Eagle Outfitters (NYSE: AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.
Why Do We Think Twice About AEO?
- 4.3% annual revenue growth over the last six years was slower than its consumer retail peers
- Forecasted revenue decline of 2% for the upcoming 12 months implies demand will fall off a cliff
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
American Eagle is trading at $12.52 per share, or 10x forward P/E. Check out our free in-depth research report to learn more about why AEO doesn’t pass our bar.
Guess (GES)
Forward P/E Ratio: 8.5x
Flexing the iconic upside-down triangle logo with a question mark, Guess (NYSE: GES) is a global fashion brand known for its trendy clothing, accessories, and denim wear.
Why Is GES Risky?
- Lackluster 4.9% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Guess’s stock price of $13.87 implies a valuation ratio of 8.5x forward P/E. If you’re considering GES for your portfolio, see our FREE research report to learn more.
Integra LifeSciences (IART)
Forward P/E Ratio: 5.3x
Founded in 1989 as a pioneer in regenerative medicine technology, Integra LifeSciences (NASDAQ: IART) develops and manufactures medical technologies for neurosurgery, wound care, and surgical reconstruction, including regenerative tissue products and surgical instruments.
Why Do We Steer Clear of IART?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 7.7 percentage points
- Free cash flow margin shrank by 21 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $12.96 per share, Integra LifeSciences trades at 5.3x forward P/E. Read our free research report to see why you should think twice about including IART in your portfolio.
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