3 Services Stocks Skating on Thin Ice

Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry has tumbled by 10.6%. This drawdown was worse than the S&P 500’s 2.4% decline.

A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. On that note, here are three services stocks we’re swiping left on.

Brady (BRC)

Market Cap: $3.30 billion

Founded in 1914 and evolving through more than a century of industrial innovation, Brady (NYSE:BRC) manufactures and supplies identification solutions and workplace safety products that help companies identify and protect their premises, products, and people.

Why Are We Wary of BRC?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Modest revenue base of $1.46 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
3. 3.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

At $69.83 per share, Brady trades at 14.2x forward P/E. If you’re considering BRC for your portfolio, see our FREE research report to learn more.

First Advantage (FA)

Market Cap: $3.03 billion

Processing approximately 100 million background checks annually across more than 200 countries and territories, First Advantage (NASDAQ:FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.

Why Are We Cautious About FA?

1. Earnings per share have dipped by 8.2% annually over the past three years, which is concerning because stock prices follow EPS over the long term
2. 17.1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

First Advantage is trading at $16.89 per share, or 18.3x forward P/E. To fully understand why you should be careful with FA, check out our full research report (it’s free).

HP (HPQ)

Market Cap: $26.87 billion

Born from the legendary Silicon Valley garage startup founded by Bill Hewlett and Dave Packard in 1939, HP (NYSE:HPQ) designs and sells personal computers, printers, and related technology products and services to consumers, businesses, and enterprises worldwide.

Why Do We Avoid HPQ?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.7% annually over the last five years
2. Projected sales growth of 2% for the next 12 months suggests sluggish demand
3. Earnings per share have contracted by 5.5% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

HP’s stock price of $28.47 implies a valuation ratio of 7.7x forward P/E. Dive into our free research report to see why there are better opportunities than HPQ.

High-Quality Stocks for All Market Conditions

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