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2 Value Stocks to Steer Clear of (and 1 Winner)

Man with no money. Businessman holding empty wallet
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Are you looking for the next value stock to set your investment portfolio on fire? Are you having trouble deciding which value stocks to buy?

Let’s look into it.

It seems like low interest rates will be with us for way longer than we thought last year. But how long can low interest rates support a “spend-more-than-you-make-and-rake-in-the-debt” mentality?

These are some of the thoughts that inform my investment thesis on the following two value stocks that I recommend you steer clear of.

Roots (TSX:ROOT)

Credit concerns, high debt levels, and global economic weakness are all cautionary trends, and mean that this value stock is one to steer clear of.

I do not view valuation as attractive on Roots stock, although it is quite low at nine times earnings.

While same-store sales growth of 3.3% in the most recent quarter was above expectations, EBITDA declined 5.2% and EPS declined 9.3%, as Roots continues to struggle.

And with slowing consumer spending, the company will have added difficulties with its expansion to the U.S., which has proven to be a very risky move even in the best of times.

Hudson’s Bay (TSX:HBC)

Hudson’s Bay continues to lose money at a staggering pace.

As a retailer that has proven unable to keep up with a rapidly changing retail industry, Hudson’s Bay remains a stock to steer clear of, despite the fact that it is trading below book value at this point.

This company looks to be dying a slow death and while there is value in its real estate, I think investors would be better investing their hard-earned money elsewhere.

A winner

Finally, I would like to talk about one value stock that I view as a winner for its 7.2% dividend yield, its strong competitive position, and its strong cash flow business.

It is a stock whose fortunes are made as consumers have more discretionary income, but it is also a stock whose fortunes are made the more consumers feel the need for an “escape.”

It is Canada’s leading film exhibition company, which is slowly turning into more of an entertainment company, offering much more than its legacy movie theatre experience.

It is Cineplex (TSX:CGX), and it is gaining momentum in its diversification strategy, which should increase its growth profile and its market.

E-gaming, entertainment complexes, and recreation rooms are attracting the entertainment spending dollars of millennials, which the company hopes will make up for the gradual slowdown in the movie theatre business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned.

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