These underperforming stocks could trap value investors.
Value investors are always on the hunt for stocks priced at a discount based on the company’s underlying business fundamentals. These investors look at metrics such as price-to-earnings ratio, price-to-sales ratio and price-to-book value to assess the potential value in a stock. Unfortunately, some stocks may appear to be a value at first glance, but investors should watch out for red flags like market share losses, mounting debt levels and businesses in secular decline. Here are nine underperforming value stocks that may prove to be value traps, according to Bank of America analysts.
McCormick & Co. (ticker: MKC)
McCormick produces spices, seasoned mixes, condiments and other ingredients for the food industry. Investors may be tempted to buy the 10% dip in McCormick stock over the past six months, but analyst Peter Galbo says McCormick faces some tremendous near-term pressure in 2021, given the company derives 80% of its sales from at-home food products. Galbo says at-home eating demand will likely remain elevated through the first half of 2021, but McCormick faces extremely difficult year-over-year comparisons in the second half of the year as people start to venture out. Bank of America has an “underperform” rating and an $85 price target for MKC stock.
Waste Management (WM)
Waste Management is the largest U.S. nonhazardous waste operator. Analyst Michael Feniger says Waste Management faces a number of near-term headwinds in coming quarters, including the potential for an uneven U.S. economic recovery that could pressure many of its commercial customers. Feniger says increasing at-home waste production and weak municipal budgets are a bad combination for Waste Management. He says the company’s earnings growth could lag many of its cyclical stock peers during the economic recovery. Bank of America has an “underperform” rating and a $119 price target for WM stock.
Wabtec (WAB)
Wabtec provides technology and services for the freight rail and passenger transit industries. The stock is up around 4% in the past month, but analyst Ken Hoexter says the stock will likely lag as locomotive demand remains weak. In fact, Wabtec recently reported its first quarter of zero North American locomotive deliveries in the history of the company. The company says that 2021 locomotive deliveries will be down 35%, and Hoexter projects just 3.3% revenue growth this year. Bank of America has an “underperform” rating and a $68 price target for WAB stock.
3M (MMM)
3M is a diversified global manufacturing company that produces products for industrial, health care and other end markets. Shares of 3M trade at just 18.3 times forward earnings, but analyst Andrew Obin says investors should be cautious as the company faces risks related to per- and polyfluoroalkyl substances. 3M is a leading producer of PFAS, which don’t break down naturally and have been linked to several diseases. If PFAS are deemed hazardous by the Biden administration, 3M could face growing legal risks. Bank of America has an “underperform” rating and a $170 price target for MMM stock.
WEC Energy Group (WEC)
WEC Energy is a diversified utility company serving customers in Wisconsin, Michigan and Minnesota. The stock is down 3% in the past six months and trades at just 21.5 times forward earnings, but analyst Julien Dumoulin-Smith says WEC shares are still overvalued relative to its regulated utility peer group. Dumoulin-Smith projects just 0.5% revenue growth and 5.8% earnings-per-share growth in 2021. He says the stock has only “marginal return potential” even after factoring in its 3% dividend. Bank of America has an “underperform” rating and an $82 price target for WEC stock.
Cerner (CERN)
Cerner is the largest public pure-play health care information technology company. The stock is down around 8% so far in 2021, but analyst Michael Cherny says the stock faces growth challenges that could limit near-term upside. As growth slows in 2021 and beyond, Cherny says Cerner could fall victim to earnings multiple contractions. He projects 5.8% sales growth and 10.2% EPS growth this year. Cherny says Cerner is simply lacking positive catalysts to drive long-term growth upside at this point. Bank of America has an “underperform” rating and a $73 price target for CERN stock.
Universal Health Services (UHS)
Universal Health Services owns and operates hospitals and therapy centers in the U.S. Universal Health shares trade at just 11 times forward earnings, 0.99 times sales and 4.9 times free cash flow per share. However, analyst Kevin Fischbeck says both the company’s hospitals and behavioral health facilities will likely continue to underperform peers. He says the company’s heavy exposure to the Las Vegas area could weigh on its overall numbers, and he projects EPS will decline by 6.9% in 2021. Bank of America has an “underperform” rating and a $136 price target for UHS stock.
Molson Coors Beverage (TAP)
Molson Coors Beverage is one of the largest brewers in the world and owner of the Coors Light, Miller Lite and Molson Canadian brands. The stock trades at just 11.8 times forward earnings, but analyst Bryan Spillane says the beer industry is extremely challenged at the moment. Spillane says Molson’s sales have slumped, and the company may be forced to ramp up spending significantly to stabilize its falling market share. In the meantime, he says the stock will trade at a discount to liquor peers. Bank of America has an “underperform” rating and a $40 price target for TAP stock.
Henry Schein (HSIC)
Henry Schein is the largest U.S. distributor of dental and medical products and services. The stock may seem like a compelling value as it’s priced at just 0.94 times sales, but Cherny says its pullback over the past three months is not a buying opportunity. Cherny says the company’s margin trajectory is uncertain. He also expects sales growth to slow from 15.1% in 2021 to just 0.4% in 2022 and says the stock will lag peers in the intermediate term. Bank of America has an “underperform” rating and a $62 price target for HSIC stock.
Nine underperforming stocks that could be value traps:
— McCormick & Co. (MKC)
— Waste Management (WM)
— Wabtec (WAB)
— 3M (MMM)
— WEC Energy Group (WEC)
— Cerner (CERN)
— Universal Health Services (UHS)
— Molson Coors Beverage (TAP)
— Henry Schein (HSIC)
