Value investing has created more billionaires than any other strategy, like Warren Buffett, who built his fortune by purchasing wonderful businesses at reasonable prices. But these hidden gems are few and far between - many stocks that appear cheap often stay that way because they face structural issues.
Identifying genuine bargains from value traps is something many investors struggle with, which is why we started StockStory - to help you find the best companies. Keeping that in mind, here are three value stocks with poor fundamentals and some alternatives you should consider instead.
Urban Outfitters (URBN)
Forward P/E Ratio: 12.8x
Founded as a purveyor of vintage items, Urban Outfitters (NASDAQ: URBN) now largely sells new apparel and accessories to teens and young adults seeking on-trend fashion.
Why Does URBN Worry Us?
- Lackluster 6.9% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Revenue base of $5.55 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Low returns on capital reflect management’s struggle to allocate funds effectively
Urban Outfitters’s stock price of $44.92 implies a valuation ratio of 12.8x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than URBN.
Macy's (M)
Forward P/E Ratio: 5.8x
With a storied history that began with its 1858 founding, Macy’s (NYSE: M) is a department store chain that sells clothing, cosmetics, accessories, and home goods.
Why Do We Avoid M?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Forecasted revenue decline of 4.7% for the upcoming 12 months implies demand will fall even further
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $11.42 per share, Macy's trades at 5.8x forward price-to-earnings. Check out our free in-depth research report to learn more about why M doesn’t pass our bar.
Dine Brands (DIN)
Forward P/E Ratio: 4.2x
Operating a franchise model, Dine Brands (NYSE: DIN) is a casual restaurant chain that owns the Applebee’s and IHOP banners.
Why Are We Cautious About DIN?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Sales were less profitable over the last five years as its earnings per share fell by 5.1% annually, worse than its revenue declines
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Dine Brands is trading at $21.80 per share, or 4.2x forward price-to-earnings. Read our free research report to see why you should think twice about including DIN in your portfolio.
Stocks We Like More
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.
