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Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry has tumbled by 3.5%. This drop was discouraging since the S&P 500 stood firm.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. With that said, here are three services stocks we’re passing on.
Avnet (AVT)
Market Cap: $4.35 billion
With a century-long history of adapting to technological evolution, Avnet (NASDAQ:AVT) is a global electronic components distributor that connects manufacturers of semiconductors and other electronic parts with businesses that need these components.
Why Are We Wary of AVT?
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Annual sales declines of 8.3% for the past two years show its products and services struggled to connect with the market during this cycle
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Earnings per share have dipped by 31% annually over the past two years, which is concerning because stock prices follow EPS over the long term
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Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.1% for the last five years
Avnet is trading at $51.45 per share, or 10.2x forward P/E. If you’re considering AVT for your portfolio, see our FREE research report to learn more.
Interpublic Group (IPG)
Market Cap: $9.42 billion
With a history dating back to 1902 and roots in the McCann-Erickson agency, Interpublic Group (NYSE:IPG) is a marketing and communications holding company that owns agencies specializing in advertising, media buying, public relations, and digital marketing services.
Why Should You Sell IPG?
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Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
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Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
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Free cash flow margin dropped by 9.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $25.49 per share, Interpublic Group trades at 9.5x forward P/E. To fully understand why you should be careful with IPG, check out our full research report (it’s free).
NV5 Global (NVEE)
Market Cap: $1.45 billion
Operating from over 100 locations across the U.S. and internationally, NV5 Global (NASDAQ:NVEE) provides engineering, environmental, geospatial, and technical consulting services to public and private sector clients for infrastructure and building projects.