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.
Identifying genuine bargains from value traps is something many investors struggle with, which is why we started StockStory - to help you find the best companies. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
Lithia (LAD)
Forward P/E Ratio: 8.4x
With a strong presence in the Western US, Lithia Motors (NYSE:LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.
Why Are We Hesitant About LAD?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Widely-available products (and therefore stiff competition) result in an inferior gross margin of 16% that must be offset through higher volumes
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Lithia’s stock price of $294.50 implies a valuation ratio of 8.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why LAD doesn’t pass our bar.
Griffon (GFF)
Forward P/E Ratio: 12.1x
Initially in the defense industry, Griffon (NYSE:GFF) is a now diversified company specializing in home improvement, professional equipment, and building products.
Why Does GFF Worry Us?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.2% annually over the last two years
- Estimated sales growth of 1.4% for the next 12 months is soft and implies weaker demand
Griffon is trading at $69.70 per share, or 12.1x forward price-to-earnings. If you’re considering GFF for your portfolio, see our FREE research report to learn more.
Dentsply Sirona (XRAY)
Forward P/E Ratio: 8.4x
Founded in 1899, Dentsply Sirona (NASDAQ:XRAY) is a leading manufacturer of dental equipment, consumables, and technology solutions.
Why Should You Sell XRAY?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Sales were less profitable over the last five years as its earnings per share fell by 7.4% annually, worse than its revenue declines
- Push for growth has led to negative returns on capital, signaling value destruction, and its shrinking returns suggest its past profit sources are losing steam
At $16.05 per share, Dentsply Sirona trades at 8.4x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than XRAY.
Stocks We Like More
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