Value stocks typically trade at discounts to the broader market, offering patient investors the opportunity to buy businesses when they’re out of favor. The key risk, however, is that these stocks are usually cheap for a reason – five cents for a piece of fruit may seem like a great deal until you find out it’s rotten.
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. Keeping that in mind, here are three value stocks climbing an uphill battle and some other investments you should look into instead.
Arcos Dorados (ARCO)
Forward P/E Ratio: 12.5x
Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE: ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.
Why Are We Cautious About ARCO?
- Gross margin of 12.7% reflects the bad unit economics inherent in most restaurant businesses
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Poor free cash flow margin of -0.7% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $7.78 per share, Arcos Dorados trades at 12.5x forward P/E. Dive into our free research report to see why there are better opportunities than ARCO.
El Pollo Loco (LOCO)
Forward P/E Ratio: 11.6x
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ: LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
Why Do We Think LOCO Will Underperform?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Revenue base of $480.8 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Estimated sales growth of 3.7% for the next 12 months is soft and implies weaker demand
El Pollo Loco is trading at $10.72 per share, or 11.6x forward P/E. To fully understand why you should be careful with LOCO, check out our full research report (it’s free).
Zimmer Biomet (ZBH)
Forward P/E Ratio: 10.5x
With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE: ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.
Why Does ZBH Worry Us?
- Sales trends were unexciting over the last five years as its 3% annual growth was below the typical healthcare company
- 1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Underwhelming 4.2% return on capital reflects management’s difficulties in finding profitable growth opportunities
Zimmer Biomet’s stock price of $86.55 implies a valuation ratio of 10.5x forward P/E. Read our free research report to see why you should think twice about including ZBH in your portfolio.
Stocks We Like More
If your portfolio success hinges on just 4 stocks, your wealth is built on fragile ground. You have a small window to secure high-quality assets before the market widens and these prices disappear.
Don’t wait for the next volatility shock. Check out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.
