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. That said, here are three value stocks with little support and some other investments you should consider instead.
Cable One (CABO)
Forward P/E Ratio: 4.5x
Founded in 1986, Cable One (NYSE: CABO) provides high-speed internet, cable television, and telephone services, primarily in smaller markets across the United States.
Why Do We Think CABO Will Underperform?
- Demand for its offerings was relatively low as its number of residential data subscribers has underwhelmed
- Forecasted revenue decline of 3% for the upcoming 12 months implies demand will fall even further
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Cable One is trading at $157.89 per share, or 4.5x forward P/E. Read our free research report to see why you should think twice about including CABO in your portfolio.
Acadia Healthcare (ACHC)
Forward P/E Ratio: 8.2x
With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ: ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.
Why Does ACHC Worry Us?
- Underwhelming admissions over the past two years imply it may need to invest in improvements to get back on track
- Free cash flow margin shrank by 24.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Acadia Healthcare’s stock price of $22.83 implies a valuation ratio of 8.2x forward P/E. Dive into our free research report to see why there are better opportunities than ACHC.
DaVita (DVA)
Forward P/E Ratio: 11.6x
With over 2,600 dialysis centers across the United States and a presence in 13 countries, DaVita (NYSE: DVA) operates a network of dialysis centers providing treatment and care for patients with chronic kidney disease and end-stage kidney disease.
Why Does DVA Fall Short?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 2.7% for the last five years
- Flat treatments over the past two years indicate demand is soft and that the company may need to revise its strategy
- Estimated sales growth of 3.4% for the next 12 months implies demand will slow from its two-year trend
At $136.03 per share, DaVita trades at 11.6x forward P/E. If you’re considering DVA for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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