Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have certainly contributed to services stocks’ recent underperformance - over the past six months, the industry’s 4.2% gain has fallen behind the S&P 500’s 6.9% rise.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. Taking that into account, here is one services stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Business Services Stocks to Sell:
Flex (FLEX)
Market Cap: $51.11 billion
Originally known as Flextronics until its 2016 rebranding, Flex (NASDAQ: FLEX) is a global manufacturing partner that designs, engineers, and builds products for companies across industries from medical devices to solar trackers.
Why Do We Think Twice About FLEX?
- The company has faced growth challenges as its 2.8% annual revenue increases over the last two years fell short of other business services companies
- Poor free cash flow margin of 2.8% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Diminishing returns on capital suggest its earlier profit pools are drying up
Flex’s stock price of $136.90 implies a valuation ratio of 32.8x forward P/E. To fully understand why you should be careful with FLEX, check out our full research report (it’s free).
Ingram Micro (INGM)
Market Cap: $6.56 billion
Operating as the crucial link in the global technology supply chain with a presence in 57 countries, Ingram Micro (NYSE: INGM) is a global technology distributor that connects manufacturers with resellers, providing hardware, software, cloud services, and logistics expertise.
Why Should You Sell INGM?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Earnings per share have contracted by 8.6% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Ingram Micro is trading at $28.45 per share, or 8.7x forward P/E. If you’re considering INGM for your portfolio, see our FREE research report to learn more.
One Business Services Stock to Watch:
Taboola (TBLA)
Market Cap: $1.29 billion
Often appearing as those "You May Also Like" or "Recommended For You" boxes at the bottom of news articles, Taboola (NASDAQ: TBLA) operates a digital platform that recommends personalized content to users across publisher websites, helping both publishers monetize their sites and advertisers reach target audiences.
Why Do We Like TBLA?
- Market share has increased this cycle as its 13.1% annual revenue growth over the last two years was exceptional
- Free cash flow margin jumped by 8.8 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
- Historical investments are beginning to pay off as its returns on capital are growing
At $4.80 per share, Taboola trades at 0.7x trailing 12-month price-to-sales. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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