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.

This distinction between true value and value traps can challenge even the most skilled investors. Luckily for you, we started StockStory to help you uncover exceptional companies. Keeping that in mind, here are three value stocks with poor fundamentals and some alternatives you should consider instead.

Chegg (CHGG)

Forward EV/EBITDA Ratio: 2.4x

Started as a physical textbook rental service, Chegg (NYSE: CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.

Why Do We Avoid CHGG?

1. Services Subscribers have declined by 17.3% annually over the last two years, suggesting it may need to revamp its features or user experience to stay competitive
2. Inability to adjust its cost structure while its revenue declined over the last few years led to a 12.8 percentage point drop in the company’s EBITDA margin
3. Sales were less profitable over the last three years as its earnings per share fell by 38.2% annually, worse than its revenue declines

Chegg’s stock price of $1.84 implies a valuation ratio of 2.4x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than CHGG.

Universal Health Services (UHS)

Forward P/E Ratio: 9.5x

With a network spanning 39 states and three countries, Universal Health Services (NYSE: UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.

Why Are We Cautious About UHS?

1. Disappointing comparable store sales over the past two years show customers aren’t responding well to its offerings and value proposition
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 1.3 percentage points
3. Poor free cash flow margin of 4.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

At $194.16 per share, Universal Health Services trades at 9.5x forward P/E. Read our free research report to see why you should think twice about including UHS in your portfolio.

Navient (NAVI)

Forward P/E Ratio: 11.5x

Spun off from Sallie Mae in 2014 to handle the company's loan servicing and collection operations, Navient (NASDAQ: NAVI) provides education loan servicing and business processing solutions that help manage federal student loans, private education loans, and government services.

Why Are We Out on NAVI?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 12.1% annually over the last five years
2. Earnings per share have contracted by 4.1% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
3. Debt-to-equity ratio of 18.7× is concerningly high, indicating excessive leverage that could limit financial flexibility

Navient is trading at $12.98 per share, or 11.5x forward P/E. To fully understand why you should be careful with NAVI, check out our full research report (it’s free).

High-Quality Stocks for All Market Conditions

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