3 Value Stocks We Steer Clear Of

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 with little support and some other investments you should consider instead.

Western Digital (WDC)

Forward P/E Ratio: 14.2x

Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.

Why Are We Out on WDC?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 10.7% annually over the last five years
2. Negative 7.7% gross margin means it loses money on every sale and must pivot or scale quickly to survive
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up

Western Digital’s stock price of $79.98 implies a valuation ratio of 14.2x forward P/E. If you’re considering WDC for your portfolio, see our FREE research report to learn more.

Xerox (XRX)

Forward P/E Ratio: 2.5x

Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ:XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.

Why Do We Avoid XRX?

1. Sales tumbled by 4.9% annually over the last five years, showing market trends are working against its favor during this cycle
2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $3.95 per share, Xerox trades at 2.5x forward P/E. Check out our free in-depth research report to learn more about why XRX doesn’t pass our bar.

Fiserv (FI)

Forward P/E Ratio: 12.5x

Powering over 1 billion accounts and processing more than 12,000 financial transactions per second globally, Fiserv (NYSE:FI) provides payment processing and financial technology solutions that enable merchants, banks, and credit unions to accept payments and manage financial transactions.

Why Are We Hesitant About FI?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.2% over the last two years was below our standards for the financials sector
2. Below-average return on equity indicates management struggled to find compelling investment opportunities

Fiserv is trading at $138.20 per share, or 12.5x forward P/E. Dive into our free research report to see why there are better opportunities than FI.

High-Quality Stocks for All Market Conditions

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