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 climbing an uphill battle and some other investments you should look into instead.
America's Car-Mart (CRMT)
Forward P/E Ratio: 7.1x
With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ: CRMT) sells used cars to budget-conscious consumers.
Why Do We Steer Clear of CRMT?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Earnings per share have dipped by 38.3% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
America's Car-Mart is trading at $29 per share, or 7.1x forward P/E. If you’re considering CRMT for your portfolio, see our FREE research report to learn more.
Travel + Leisure (TNL)
Forward P/E Ratio: 9.2x
Formerly known as Wyndham Destinations, Travel + Leisure (NYSE: TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.
Why Does TNL Worry Us?
- Number of tours conducted has disappointed over the past two years, indicating weak demand for its offerings
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $61.51 per share, Travel + Leisure trades at 9.2x forward P/E. Dive into our free research report to see why there are better opportunities than TNL.
ManpowerGroup (MAN)
Forward P/E Ratio: 11.1x
Founded during the post-World War II economic boom when businesses needed temporary workers, ManpowerGroup (NYSE: MAN) connects millions of people to employment opportunities through its global network of staffing, recruitment, and workforce management services.
Why Do We Think MAN Will Underperform?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 16% annually, worse than its revenue
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
ManpowerGroup’s stock price of $38.63 implies a valuation ratio of 11.1x forward P/E. To fully understand why you should be careful with MAN, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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