Value stocks can have a lot of benefits for investors. Typically, they are larger, well-established companies that are profitable and have a record of delivering solid financial results. Oftentimes, value stocks pay a dividend to their stockholders.
However, value stocks get their name because their share price tends to trade below what analysts feel the stock is worth. The share price does not match the intrinsic value of the stock, making it a bargain for investors to buy. This is the opposite of growth stocks, which tend to trade at many multiples above their value and can often become overvalued or extremely expensive to purchase.
However, sometimes, even value stocks are not good buys. Some well-established companies lose their way and the share price declines for good reasons. This could be due to declining sales, a loss of market share, a poorly executed acquisition or sale, or new management. Value stocks that have long-term problems can end up becoming “value traps,” which are poor-performing investments over the long-term.
Whatever the cause, not all value stocks are worth investor capital. Here are ticking time bombs: three value stocks to dump before the damage is done.
Hershey Co. (HSY)
After peaking on May 1 of this year, it’s been all downhill for chocolate maker Hershey Co. (NYSE:HSY). Since that day, HSY stock has declined 27%. The company’s share price is now down 11% for the year. The drop has been a head scratcher given that, in late July, Hershey reported an across the board earnings beat and raised its quarterly dividend payment by 15% to $1.19 a share. Hershey has now paid an uninterrupted dividend to its shareholders since 1930.
Apparently the decline in HSY stock is due to flooding in Africa that occurred this summer, wiping out cocoa crops on plantations throughout the Ivory Coast. The flooding has destroyed much of the cocoa crop for the next year, which is bad news considering that Africa is the world’s top supplier of the main ingredient found in chocolate. For Hershey, which produces $10 billion worth of chocolate each year, the loss of Africa’s cocoa crop is likely to mean higher prices, which will dent the company’s bottom line.
Long-term, HSY stock might still be a sound investment. But in the near-term, the share price is likely to continue trending lower.
In mid-August, discount retailer Target (NYSE:TGT) issued disappointing quarterly results and lowered its forward guidance, a double whammy that sent the company’s shares spiraling downward. TGT stock is now down nearly 30% this year as sales at its retail outlets stumble. For this year’s second quarter, Target reported earnings per share (EPS) of $1.80 versus $1.39 that was expected among analysts. Revenue in the quarter amounted to $24.77 billion, which was below the $25.16 billion that had been forecast.
Target cut both its full-year sales and profit forecasts, saying consumers are refusing to spend on discretionary items at its stores. The company now expects comparable store sales to decline by about mid single digits for its full fiscal year. Essential items, such as groceries, account for only about 20% of Target’s annual revenue compared with more than half of rival Walmart’s (NYSE:WMT) annual sales. Target continues to struggle to attract shoppers amid high inflation, making TGT stock one to avoid.
J.M. Smucker (SJM)
J.M. Smucker’s (NYSE:SJM) $5 billion takeover of Hostess Brands (NASDAQ:TWNK) has been given the thumbs down by investors. Since the deal was announced, SJM stock has fallen 15%, bringing the company’s year to date loss to 22%. J.M. Smucker, which is known for making jams and peanut butter, feels that the addition of Twinkies and Ding Dong snack cakes will help to grow and diversify its business. And yet, investors seem to feel otherwise.
Wall Street doesn’t seem to like that Hostess Brands has filed for bankruptcy twice before, in 2004 and again in 2012, due to high debt levels. Hostess brands currently has more than $1 billion of debt. Analysts and investors might also feel that sugary snacks such as Ho-Hos and Zingers might ultimately not fit with J.M. Smucker’s healthier product line-up that also includes Bick’s pickles, Five Roses flour, and Folgers coffee. Whatever the reasons, SJM stock is trending in the wrong direction and investors should steer clear.
On the date of publication, Joel Baglole held a long position in HSY. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.