3 Services Stocks We Steer Clear Of

Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. But increasing competition from AI-driven upstarts has tempered enthusiasm, and over the past six months, the industry has pulled back by 2.2%. This performance was disheartening since the S&P 500 gained 5.4%.

Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. Taking that into account, here are three services stocks that may face trouble.

Avnet (AVT)

Market Cap: $4.49 billion

With a century-long history of adapting to technological evolution, Avnet (NASDAQ:AVT) is a global electronic components distributor that connects manufacturers of semiconductors and other electronic parts with businesses that need these components.

Why Does AVT Fall Short?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 8.3% annually over the last two years
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.1% for the last five years

Avnet’s stock price of $53.50 implies a valuation ratio of 10.5x forward P/E. Check out our free in-depth research report to learn more about why AVT doesn’t pass our bar.

Insight Enterprises (NSIT)

Market Cap: $4.57 billion

With over 35 years of IT expertise and partnerships with more than 8,000 technology providers, Insight Enterprises (NASDAQ:NSIT) provides end-to-end digital transformation solutions that help businesses modernize their IT infrastructure and maximize the value of technology.

Why Do We Steer Clear of NSIT?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 8.7% annually over the last two years
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.6% annually
3. Low free cash flow margin of 3.5% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

At $145.82 per share, Insight Enterprises trades at 14.6x forward P/E. If you’re considering NSIT for your portfolio, see our FREE research report to learn more.

NV5 Global (NVEE)

Market Cap: $1.52 billion

Operating from over 100 locations across the U.S. and internationally, NV5 Global (NASDAQ:NVEE) provides engineering, environmental, geospatial, and technical consulting services to public and private sector clients for infrastructure and building projects.

Why Are We Hesitant About NVEE?

1. Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 5.1 percentage points
2. Earnings per share fell by 2.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Free cash flow margin shrank by 13.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

NV5 Global is trading at $23.34 per share, or 17.4x forward P/E. Read our free research report to see why you should think twice about including NVEE in your portfolio.

Stocks We Like More

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