The S&P 500 (^GSPC) is home to the biggest and most well-known companies in the market, making it a go-to index for investors seeking stability. But not all large-cap stocks are created equal - some are struggling with slowing growth, declining margins, or increased competition.
Some large-cap stocks are past their peak, and StockStory is here to help you separate the winners from the laggards. That said, here are three S&P 500 stocks to avoid and some better alternatives instead.
Dollar General (DG)
Market Cap: $22.98 billion
Appealing to the budget-conscious consumer, Dollar General (NYSE: DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.
Why Are We Hesitant About DG?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Widely-available products (and therefore stiff competition) result in an inferior gross margin of 29.9% that must be offset through higher volumes
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Dollar General’s stock price of $103.95 implies a valuation ratio of 17x forward P/E. Dive into our free research report to see why there are better opportunities than DG.
United Parcel Service (UPS)
Market Cap: $71.49 billion
Trademarking its recognizable UPS Brown color, UPS (NYSE: UPS) offers package delivery, supply chain management, and freight forwarding services.
Why Do We Pass on UPS?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
United Parcel Service is trading at $84.50 per share, or 11.5x forward P/E. Read our free research report to see why you should think twice about including UPS in your portfolio.
International Paper (IP)
Market Cap: $24.28 billion
Established in 1898, International Paper (NYSE: IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.
Why Are We Out on IP?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.6 percentage points
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $45.99 per share, International Paper trades at 15.3x forward P/E. Check out our free in-depth research report to learn more about why IP doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
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