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.
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 climbing an uphill battle and some other investments you should look into instead.
Yext (YEXT)
Forward P/S Ratio: 2.4x
Built to solve the problem of inconsistent business information scattered across the internet, Yext (NYSE: YEXT) provides a digital presence platform that helps businesses manage their information across websites, maps, apps, and search engines.
Why Are We Out on YEXT?
- Average ARR growth of 9.1% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 3.4 percentage points
Yext’s stock price of $8.27 implies a valuation ratio of 2.4x forward price-to-sales. Check out our free in-depth research report to learn more about why YEXT doesn’t pass our bar.
EnerSys (ENS)
Forward P/E Ratio: 12.1x
Supplying batteries that power equipment as big as mining rigs, EnerSys (NYSE: ENS) manufactures various kinds of batteries for a range of industries.
Why Is ENS Not Exciting?
- Declining unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 1.6%
- Poor free cash flow margin of 4.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
EnerSys is trading at $122.20 per share, or 12.1x forward P/E. If you’re considering ENS for your portfolio, see our FREE research report to learn more.
Textron (TXT)
Forward P/E Ratio: 12.7x
Listed on the NYSE in 1947, Textron (NYSE: TXT) provides products and services in the aerospace, defense, industrial, and finance sectors.
Why Are We Hesitant About TXT?
- 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 2.3% for the last five years
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 6.9 percentage points
At $81.45 per share, Textron trades at 12.7x forward P/E. To fully understand why you should be careful with TXT, check out our full research report (it’s free for active Edge members).
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