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Value stocks typically trade at discounts to the broader market, offering patient investors the opportunity to buy businesses when they’re out of favor. The key risk, however, is that these stocks are usually cheap for a reason – five cents for a piece of fruit may seem like a great deal until you find out it’s rotten.
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 two value stocks offering compelling risk-reward profiles and one with little support.
One Value Stock to Sell:
Caleres (CAL)
Forward P/E Ratio: 4.9x
The owner of Dr. Scholl's, Caleres (NYSE:CAL) is a footwear company offering a range of styles.
Why Do We Think CAL Will Underperform?
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Sales tumbled by 1.4% annually over the last five years, showing consumer trends are working against its favor
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Estimated sales for the next 12 months are flat and imply a softer demand environment
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Below-average returns on capital indicate management struggled to find compelling investment opportunities
Caleres is trading at $15.26 per share, or 4.9x forward P/E. Read our free research report to see why you should think twice about including CAL in your portfolio, it’s free.
Two Value Stocks to Watch:
Napco (NSSC)
Forward P/E Ratio: 21.1x
Protecting everything from schools to government facilities since 1969, Napco Security Technologies (NASDAQ:NSSC) manufactures electronic security devices, access control systems, and communication services for intrusion and fire alarm systems.
Why Is NSSC a Good Business?
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Market share has increased this cycle as its 10.9% annual revenue growth over the last five years was exceptional
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Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its improved cash conversion implies it’s becoming a less capital-intensive business
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Returns on capital are climbing as management makes more lucrative bets
Napco’s stock price of $24.95 implies a valuation ratio of 21.1x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.
Thermon (THR)
Forward P/E Ratio: 14x
Creating the first packaged tracing systems, Thermon (NYSE:THR) is a leading provider of engineered industrial process heating solutions for process industries.
Why Are We Fans of THR?
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Offerings are mission-critical for businesses and result in a premier gross margin of 42.3%
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Operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
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Free cash flow margin expanded by 3.2 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
