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.
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. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
Sensata Technologies (ST)
Forward P/E Ratio: 10.6x
Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.
Why Should You Sell ST?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.4% annually over the last two years
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3%
- Gross margin of 29.3% reflects its high production costs
Sensata Technologies is trading at $38.92 per share, or 10.6x forward P/E. Read our free research report to see why you should think twice about including ST in your portfolio.
Franklin Resources (BEN)
Forward P/E Ratio: 9.8x
Operating under the widely recognized Franklin Templeton brand since 1947, Franklin Resources (NYSE: BEN) is a global investment management organization that offers financial services and solutions to individuals, institutions, and wealth advisors worldwide.
Why Do We Avoid BEN?
- Muted 4.5% annual revenue growth over the last two years shows its demand lagged behind its financials peers
- Earnings per share fell by 2.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Below-average return on equity indicates management struggled to find compelling investment opportunities
At $24.86 per share, Franklin Resources trades at 9.8x forward P/E. If you’re considering BEN for your portfolio, see our FREE research report to learn more.
Forestar Group (FOR)
Forward P/E Ratio: 8.9x
As a majority-owned subsidiary of homebuilding giant D.R. Horton, Forestar Group (NYSE: FOR) develops and sells finished residential lots to homebuilders, focusing primarily on land acquisition and development for single-family homes.
Why Do We Steer Clear of FOR?
- 11.2% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Cash-burning history makes us doubt the long-term viability of its business model
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Forestar Group’s stock price of $25.99 implies a valuation ratio of 8.9x forward P/E. Dive into our free research report to see why there are better opportunities than FOR.
Stocks We Like More
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