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 with poor fundamentals and some alternatives you should consider instead.
Flywire (FLYW)
Forward P/S Ratio: 2.2x
Originally created to process international tuition payments for universities, Flywire (NASDAQ: FLYW) is a cross border payments processor and software platform focusing on complex, high-value transactions like education, healthcare and B2B payments.
Why Does FLYW Worry Us?
- Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 63.6%
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Historical operating margin losses show it had an inefficient cost structure while scaling
Flywire’s stock price of $10.93 implies a valuation ratio of 2.2x forward price-to-sales. If you’re considering FLYW for your portfolio, see our FREE research report to learn more.
Carnival (CCL)
Forward P/E Ratio: 13.1x
Boasting outrageous amenities like a planetarium on board its ships, Carnival (NYSE: CCL) is one of the world's largest leisure travel companies and a prominent player in the cruise industry.
Why Do We Steer Clear of CCL?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4% for the last five years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 15% annually while its revenue grew
- Negative returns on capital show management lost money while trying to expand the business
At $23.59 per share, Carnival trades at 13.1x forward P/E. Check out our free in-depth research report to learn more about why CCL doesn’t pass our bar.
Alight (ALIT)
Forward P/E Ratio: 8.3x
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 Should You Sell ALIT?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.9% annually over the last five years
- Earnings per share have dipped by 3.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
Alight is trading at $5.43 per share, or 8.3x forward P/E. Read our free research report to see why you should think twice about including ALIT in your portfolio.
High-Quality Stocks for All Market Conditions
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