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.
MGP Ingredients (MGPI)
Forward P/E Ratio: 11.4x
Headquartered in Atchison, Kansas, MGP Ingredients (NASDAQ: MGPI) is a leading supplier of high-quality ingredients to the food and beverage industry
Why Do We Steer Clear of MGPI?
- Annual sales declines of 11.8% for the past three years show its products struggled to connect with the market
- Operating margin declined by 28.2 percentage points over the last year as its sales cratered
- Earnings per share have contracted by 17% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
At $18.20 per share, MGP Ingredients trades at 11.4x forward P/E. Read our free research report to see why you should think twice about including MGPI in your portfolio.
CVS Health (CVS)
Forward P/E Ratio: 10.6x
With over 9,000 retail pharmacy locations serving as neighborhood health destinations across America, CVS Health (NYSE: CVS) operates retail pharmacies, provides pharmacy benefit management services, and offers health insurance through its Aetna subsidiary.
Why Do We Think Twice About CVS?
- The company has faced growth challenges as its 6% annual revenue increases over the last two years fell short of other healthcare companies
- Projected sales are flat for the next 12 months, implying demand will slow from its two-year trend
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 2.1% annually
CVS Health is trading at $75.69 per share, or 10.6x forward P/E. Dive into our free research report to see why there are better opportunities than CVS.
Pinnacle Financial Partners (PNFP)
Forward P/B Ratio: 0.9x
Founded in 2000 with a focus on delivering big-bank capabilities with community bank personalization, Pinnacle Financial Partners (NASDAQ: PNFP) is a Tennessee-based financial holding company that provides banking, investment, trust, mortgage, and insurance services to businesses and individuals.
Why Is PNFP Not Exciting?
- Weak unit economics are reflected in its net interest margin of 3.2%, one of the worst among bank companies
- Expenses have increased as a percentage of revenue over the last four years as its efficiency ratio degraded by 7.4 percentage points
- Estimated tangible book value per share growth of 2.5% for the next 12 months implies profitability will slow from its two-year trend
Pinnacle Financial Partners’s stock price of $85 implies a valuation ratio of 0.9x forward P/B. To fully understand why you should be careful with PNFP, check out our full research report (it’s free).
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