Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Market leaders have certainly capitalized on outsourcing trends and digital transformation initiatives to boost sales, helping fuel a 26.3% gain for the industry over the past six months - 3.4 percentage points higher than the S&P 500.

Regardless of these results, investors must exercise caution as many companies in this space are sensitive to the ebbs and flows of the broader economy. Taking that into account, here are three services stocks we’re steering clear of.

U.S. Cellular (USM)

Market Cap: $4.26 billion

Operating as a majority-owned subsidiary of Telephone and Data Systems since its founding in 1983, US Cellular (NYSE: USM) is a regional wireless telecommunications provider serving 4.6 million customers across 21 states with mobile phone, internet, and IoT services.

Why Do We Pass on USM?

1. Sales tumbled by 1.6% annually over the last five years, showing market trends are working against its favor during this cycle
2. Adjusted operating profits fell over the last five years as its sales dropped and it struggled to adjust its fixed costs
3. Earnings per share have dipped by 16.5% annually over the past five years, which is concerning because stock prices follow EPS over the long term

U.S. Cellular’s stock price of $77.01 implies a valuation ratio of 63.3x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than USM.

ePlus (PLUS)

Market Cap: $1.94 billion

Starting as a financing company in 1990 before evolving into a full-service technology provider, ePlus (NASDAQ: PLUS) provides comprehensive IT solutions, professional services, and financing options to help organizations optimize their technology infrastructure and supply chain processes.

Why Are We Out on PLUS?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Forecasted revenue decline of 3.1% for the upcoming 12 months implies demand will fall off a cliff
3. Earnings per share have contracted by 6.2% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

At $73.59 per share, ePlus trades at 18.5x forward P/E. If you’re considering PLUS for your portfolio, see our FREE research report to learn more.

ScanSource (SCSC)

Market Cap: $938.4 million

Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.

Why Should You Sell SCSC?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 11.4% annually over the last two years
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. Below-average returns on capital indicate management struggled to find compelling investment opportunities

ScanSource is trading at $42.88 per share, or 10.5x forward P/E. Read our free research report to see why you should think twice about including SCSC in your portfolio.

Stocks We Like More

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