Yahoo Finance

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.

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. That said, here are three value stocks with poor fundamentals and some alternatives you should consider instead.

Gap (GAP)

Forward P/E Ratio: 10.6x

Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE:GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.

Why Should You Dump GAP?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations

2. Projected sales for the next 12 months are flat and suggest demand will be subdued

3. Low returns on capital reflect management’s struggle to allocate funds effectively

Gap is trading at $22.97 per share, or 10.6x forward P/E. Read our free research report to see why you should think twice about including GAP in your portfolio, it’s free.

Acuity Brands (AYI)

Forward P/E Ratio: 13.9x

One of the pioneers of smart lights, Acuity (NYSE:AYI) designs and manufactures light fixtures and building management systems used in various industries.

Why Does AYI Fall Short?

1. Sales tumbled by 1.9% annually over the last two years, showing market trends are working against its favor during this cycle

2. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth

3. Free cash flow margin dropped by 2.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Acuity Brands’s stock price of $256.29 implies a valuation ratio of 13.9x forward P/E. If you’re considering AYI for your portfolio, see our FREE research report to learn more.

Gilead Sciences (GILD)

Forward P/E Ratio: 12x

From its groundbreaking work in developing the first single-tablet regimens for HIV treatment, Gilead Sciences (NASDAQ:GILD) develops and markets innovative medicines for life-threatening diseases including HIV, viral hepatitis, COVID-19, and cancer.

Why Are We Cautious About GILD?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.1% over the last two years was below our standards for the healthcare sector

2. Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend

3. Waning returns on capital imply its previous profit engines are losing steam