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.
This distinction between true value and value traps can challenge even the most skilled investors. Luckily for you, we started StockStory to help you uncover exceptional companies. Keeping that in mind, here are three value stocks climbing an uphill battle and some other investments you should look into instead.
Labcorp (LH)
Forward P/E Ratio: 14.9x
With over 600 million tests performed annually and involvement in 90% of FDA-approved drugs in 2023, Labcorp (NYSE:LH) provides laboratory testing services and drug development solutions to doctors, hospitals, pharmaceutical companies, and patients worldwide.
Why Does LH Fall Short?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 9.4 percentage points
- Earnings per share fell by 7.2% annually over the last five years while its revenue was flat, showing each sale was less profitable
At $264 per share, Labcorp trades at 14.9x forward P/E. Dive into our free research report to see why there are better opportunities than LH.
IQVIA (IQV)
Forward P/E Ratio: 13.2x
Created from the 2016 merger of Quintiles (a clinical research organization) and IMS Health (a healthcare data specialist), IQVIA (NYSE:IQV) provides clinical research services, data analytics, and technology solutions to help pharmaceutical companies develop and market medications more effectively.
Why Does IQV Give Us Pause?
- Annual sales growth of 2.8% over the last two years lagged behind its healthcare peers as its large revenue base made it difficult to generate incremental demand
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Free cash flow margin dropped by 3.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
IQVIA’s stock price of $170.25 implies a valuation ratio of 13.2x forward P/E. If you’re considering IQV for your portfolio, see our FREE research report to learn more.
Franklin BSP Realty Trust (FBRT)
Forward P/B Ratio: 0.7x
Operating as a specialized real estate investment trust (REIT) with roots dating back to 2012, Franklin BSP Realty Trust (NYSE:FBRT) originates and manages a diversified portfolio of commercial real estate debt investments secured by properties in the United States and abroad.
Why Do We Avoid FBRT?
- 6.1% annual net interest income growth over the last five years was slower than its banking peers
- Forecasted net interest income decline of 5.7% for the upcoming 12 months implies demand will fall off a cliff
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
Franklin BSP Realty Trust is trading at $9.16 per share, or 0.7x forward P/B. Check out our free in-depth research report to learn more about why FBRT doesn’t pass our bar.
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