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, and a low valuation can reflect underlying business challenges rather than a genuine bargain.
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.
Hillman (HLMN)
Forward P/E ratio: 13.9x
Established when Max Hillman purchased a franchise operation, Hillman (NASDAQ: HLMN) designs, manufactures, and sells industrial equipment and systems for various sectors.
Why Are We Hesitant About HLMN?
- Muted 3% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.8% annually
- Low returns on capital reflect management’s struggle to allocate funds effectively
Hillman’s stock price of $8.53 implies a valuation ratio of 13.9x forward P/E. Read our free research report to see why you should think twice about including HLMN in your portfolio.
Gates Industrial Corporation (GTES)
Forward P/E ratio: 12.9x
Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE: GTES) offers power transmission and fluid transfer equipment for various industries.
Why Are We Wary of GTES?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 5.4% annually
- ROIC of 6.9% reflects management’s challenges in identifying attractive investment opportunities
At $23.63 per share, Gates Industrial Corporation trades at 12.9x forward P/E. To fully understand why you should be careful with GTES, check out our full research report (it’s free).
Zoetis (ZTS)
Forward P/E ratio: 14.4x
Originally spun off from Pfizer in 2013 as the world's largest pure-play animal health company, Zoetis (NYSE: ZTS) discovers, develops, and sells medicines, vaccines, diagnostic products, and services for pets and livestock animals worldwide.
Why Does ZTS Give Us Pause?
- Sales trends were unexciting over the last two years as its 1.2% annual growth was below the typical healthcare company
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
Zoetis is trading at $80.88 per share, or 14.4x forward P/E. If you’re considering ZTS for your portfolio, see our FREE research report to learn more.
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