Value investing has produced some of the world’s most famous investing billionaires, including Warren Buffett, David Einhorn, and Seth Klarman, who built their fortunes 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 climbing an uphill battle and some other investments you should look into instead.
Tecnoglass (TGLS)
Forward P/E Ratio: 11.8x
The first-ever Colombian company to trade on the NASDAQ, Tecnoglass (NYSE:TGLS) is a manufacturer of architectural glass, windows, and aluminum products.
Why Does TGLS Worry Us?
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 5.2% annually while its revenue grew
- Free cash flow margin shrank by 9.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $43.15 per share, Tecnoglass trades at 11.8x forward P/E. To fully understand why you should be careful with TGLS, check out our full research report (it’s free).
Gates Industrial Corporation (GTES)
Forward P/E Ratio: 13.7x
Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE:GTES) offers power transmission and fluid transfer equipment for various industries.
Why Are We Hesitant About GTES?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Projected sales growth of 3.8% for the next 12 months suggests sluggish demand
- Underwhelming 7.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
Gates Industrial Corporation is trading at $21.04 per share, or 13.7x forward P/E. Check out our free in-depth research report to learn more about why GTES doesn’t pass our bar.
Voya Financial (VOYA)
Forward P/E Ratio: 6.8x
Originally spun off from Dutch financial giant ING in 2013 and rebranded with a name suggesting "voyage," Voya Financial (NYSE:VOYA) provides workplace benefits and savings solutions to U.S. employers, helping their employees achieve better financial outcomes through retirement plans and insurance products.
Why Does VOYA Give Us Pause?
- 6.5% annual revenue growth over the last two years was slower than its financials peers
- Performance over the past two years shows its incremental sales were less profitable, as its 5.4% annual earnings per share growth trailed its revenue gains
- Annual tangible book value per share declines of 15.6% for the past five years show its capital management struggled during this cycle
Voya Financial’s stock price of $66.89 implies a valuation ratio of 6.8x forward P/E. If you’re considering VOYA for your portfolio, see our FREE research report to learn more.
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