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. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
PagerDuty (PD)
Forward P/S Ratio: 3x
Born from the frustration of developers being woken up by unprioritized alerts, PagerDuty (NYSE:PD) is a digital operations management platform that helps organizations detect and respond to IT incidents, outages, and other critical issues in real-time.
Why Are We Wary of PD?
- Average billings growth of 5.9% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 5.8% for the next 12 months implies demand will slow from its two-year trend
- Poor expense management has led to operating margin losses
At $16.48 per share, PagerDuty trades at 3x forward price-to-sales. If you’re considering PD for your portfolio, see our FREE research report to learn more.
Brighthouse Financial (BHF)
Forward P/B Ratio: 0.6x
Spun off from MetLife in 2017 to focus specifically on retail financial products, Brighthouse Financial (NASDAQ:BHF) provides annuity contracts and life insurance products designed to help individuals protect wealth, generate income, and transfer assets.
Why Do We Think Twice About BHF?
- Net premiums earned contracted by 1.9% annually over the last five years, showing unfavorable market dynamics this cycle
- Book value per share tumbled by 15.1% annually over the last five years, showing insurance sector trends are working against its favor during this cycle
- Debt-to-equity ratio of 1.3× shows the firm has taken on excessive debt, leaving little room for error
Brighthouse Financial’s stock price of $48.31 implies a valuation ratio of 0.6x forward P/B. Check out our free in-depth research report to learn more about why BHF doesn’t pass our bar.
Ellington Financial (EFC)
Forward P/B Ratio: 1x
Operating under the guidance of Ellington Management Group, a respected name in structured credit markets, Ellington Financial (NYSE:EFC) acquires and manages a diverse portfolio of mortgage-related, consumer-related, and other financial assets to generate returns for investors.
Why Do We Think EFC Will Underperform?
- Muted 5% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Annual tangible book value per share declines of 2.9% for the past five years show its capital management struggled during this cycle
Ellington Financial is trading at $13.58 per share, or 1x forward P/B. Dive into our free research report to see why there are better opportunities than EFC.
High-Quality Stocks for All Market Conditions
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