Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Market leaders have certainly capitalized on outsourcing trends and digital transformation initiatives to boost sales, helping fuel a 16.9% gain for the industry over the past six months. This performance has closely followed the S&P 500.

Regardless of these results, investors must exercise caution as many companies in this space are sensitive to the ebbs and flows of the broader economy. Taking that into account, here are three services stocks we’re passing on.

MSA Safety (MSA)

Market Cap: $6.73 billion

Founded in 1914 as Mine Safety Appliances to protect coal miners from dangerous gases, MSA Safety (NYSE: MSA) designs and manufactures advanced safety products that protect workers and facilities across industries including fire service, energy, construction, and manufacturing.

Why Are We Cautious About MSA?

1. Sales trends were unexciting over the last two years as its 4.6% annual growth was below the typical business services company
2. Smaller revenue base of $1.83 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 9.3% annually

At $171.89 per share, MSA Safety trades at 20.6x forward P/E. Check out our free in-depth research report to learn more about why MSA doesn’t pass our bar.

Alight (ALIT)

Market Cap: $1.99 billion

Born from a corporate spinoff in 2017 to focus on employee experience technology, Alight (NYSE: ALIT) provides human capital management solutions that help companies administer employee benefits, payroll, and workforce management systems.

Why Do We Pass on ALIT?

1. Sales tumbled by 2.5% annually over the last five years, showing market trends are working against its favor during this cycle
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Alight is trading at $3.77 per share, or 6x forward P/E. Dive into our free research report to see why there are better opportunities than ALIT.

Taboola (TBLA)

Market Cap: $1.01 billion

Often appearing as those "You May Also Like" or "Recommended For You" boxes at the bottom of news articles, Taboola (NASDAQ: TBLA) operates a digital platform that recommends personalized content to users across publisher websites, helping both publishers monetize their sites and advertisers reach target audiences.

Why Does TBLA Fall Short?

1. Earnings growth underperformed the sector average over the last three years as its EPS grew by just 2% annually
2. 2,406.2 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
3. Negative returns on capital show management lost money while trying to expand the business

Taboola’s stock price of $3.38 implies a valuation ratio of 8.3x forward EV-to-EBITDA. To fully understand why you should be careful with TBLA, check out our full research report (it’s free).

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