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. That said, here are three value stocks facing an uphill battle and some other investments you should look into instead.
DocuSign (DOCU)
Forward P/S Ratio: 2.5x
Creating the digital equivalent of "sign on the dotted line" for over a billion users worldwide, DocuSign (NASDAQ: DOCU) provides an agreement management platform that enables businesses to electronically prepare, sign, and manage documents and contracts.
Why Should You Dump DOCU?
- Underwhelming ARR growth of 8.5% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
DocuSign is trading at $45.00 per share, or 2.5x forward price-to-sales. If you’re considering DOCU for your portfolio, see our FREE research report to learn more.
Yum China (YUMC)
Forward P/E Ratio: 14.1x
One of China’s largest restaurant companies, Yum China (NYSE: YUMC) is an independent entity spun off from Yum! Brands in 2016.
Why Does YUMC Worry Us?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 5.4%
- Lacking pricing power results in an inferior gross margin of 20.3% that must be offset by turning more tables
Yum China’s stock price of $43.82 implies a valuation ratio of 14.1x forward P/E. Dive into our free research report to see why there are better opportunities than YUMC.
DaVita (DVA)
Forward P/E Ratio: 13x
With over 2,600 dialysis centers across the United States and a presence in 13 countries, DaVita (NYSE: DVA) operates a network of dialysis centers providing treatment and care for patients with chronic kidney disease and end-stage kidney disease.
Why Does DVA Fall Short?
- Flat treatments over the past two years suggest it might have to lower prices to accelerate growth
- Estimated sales growth of 2.6% for the next 12 months implies demand will slow from its two-year trend
- Free cash flow margin shrank by 1.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $197.31 per share, DaVita trades at 13x forward P/E. Read our free research report to see why you should think twice about including DVA in your portfolio.
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