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.
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. That said, here are three value stocks climbing an uphill battle and some other investments you should look into instead.
B&G Foods (BGS)
Forward P/E Ratio: 7.7x
Started as a small grocery store in New York City, B&G Foods (NYSE: BGS) is an American packaged foods company with a diverse portfolio of more than 50 brands.
Why Should You Dump BGS?
- Products aren't resonating with the market as its revenue declined by 3.9% annually over the last three years
- Sales were less profitable over the last three years as its earnings per share fell by 27.2% annually, worse than its revenue declines
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
B&G Foods’s stock price of $4.57 implies a valuation ratio of 7.7x forward P/E. To fully understand why you should be careful with BGS, check out our full research report (it’s free).
Toll Brothers (TOL)
Forward P/E Ratio: 10.3x
Started by two brothers who started by building and selling just one home in Pennsylvania, today Toll Brothers (NYSE: TOL) is a luxury homebuilder across the United States.
Why Does TOL Give Us Pause?
- Demand cratered as it couldn’t win new orders over the past two years, leading to an average 6.3% decline in its backlog
- Earnings per share have contracted by 1.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Free cash flow margin shrank by 6.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Toll Brothers is trading at $144.63 per share, or 10.3x forward P/E. Read our free research report to see why you should think twice about including TOL in your portfolio.
Ally Financial (ALLY)
Forward P/E Ratio: 9x
Born from the former GMAC (General Motors Acceptance Corporation) and rebranded in 2010, Ally Financial (NYSE: ALLY) operates a digital-first bank offering auto financing, insurance, mortgage lending, and investment services to consumers and commercial clients.
Why Do We Avoid ALLY?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.8% annually over the last two years
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 8.9% annually, worse than its revenue
- Capital trends were unexciting over the last five years as its 1.7% annual tangible book value per share growth was below the typical financials firm
At $41.21 per share, Ally Financial trades at 9x forward P/E. Dive into our free research report to see why there are better opportunities than ALLY.
Stocks We Like More
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