3 Value Stocks with Questionable Fundamentals

Value investing has created more billionaires than any other strategy, like Warren Buffett, who built his fortune 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.

Separating the winners from the value traps is a tough challenge, and that’s where StockStory comes in. Our job is to find you high-quality companies that will stand the test of time. That said, here are three value stocks climbing an uphill battle and some other investments you should look into instead.

Forward P/E Ratio: 10.7x

Sporting a global footprint of facilities, Photronics (NASDAQ:PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.

Why Does PLAB Worry Us?

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

2. Gross margin of 36.2% reflects its high production costs

3. Low free cash flow margin of 13% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Photronics’s stock price of $20.29 implies a valuation ratio of 10.7x forward P/E. To fully understand why you should be careful with PLAB, check out our full research report (it’s free for active Edge members).

Forward P/E Ratio: 14.6x

Expanding its markets through acquisitions since its founding, Alamo (NSYE:ALG) designs, manufactures, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural use.

Why Are We Cautious About ALG?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 1.3% annually over the last two years

2. Anticipated sales growth of 5.1% for the next year implies demand will be shaky

3. Earnings per share have contracted by 5.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

Alamo is trading at $157.85 per share, or 14.6x forward P/E. Read our free research report to see why you should think twice about including ALG in your portfolio, it’s free for active Edge members.

Forward P/E Ratio: 7.7x

Born from the former GMAC (General Motors Acceptance Corporation) and rebranded in 2010, Ally Financial (NYSE:ALLY) operates a digital-first bank offering auto financing, insurance, mortgage lending, and investment services to consumers and commercial clients.

Why Do We Steer Clear of ALLY?

1. Annual sales declines of 3.2% for the past two years show its products and services struggled to connect with the market during this cycle

2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term

3. Tier one capital ratio of 9.7% is insufficient to meet regulatory requirements, increasing the probability of government intervention