Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. Market leaders have certainly capitalized on outsourcing trends and digital transformation initiatives to boost sales, helping fuel a 9.1% gain for the industry over the past six months. This performance has closely followed 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. On that note, here are three services stocks we’re steering clear of.
Dell (DELL)
Market Cap: $83.51 billion
Founded by Michael Dell in his University of Texas dorm room in 1984 with just $1,000, Dell Technologies (NYSE:DELL) provides hardware, software, and services that help organizations build their IT infrastructure, manage cloud environments, and enable digital transformation.
Why Are We Cautious About DELL?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3.7% for the last five years
- Customers were hesitant to make long-term commitments to its offerings as its 3.6% average ARR growth over the past two years was sluggish
- Free cash flow margin dropped by 6.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $125.99 per share, Dell trades at 10.4x forward P/E. Check out our free in-depth research report to learn more about why DELL doesn’t pass our bar.
Kyndryl (KD)
Market Cap: $2.54 billion
Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE:KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.
Why Does KD Worry Us?
- Annual sales declines of 4.8% for the past five years show its products and services struggled to connect with the market during this cycle
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- Push for growth has led to negative returns on capital, signaling value destruction
Kyndryl is trading at $11.18 per share, or 3.7x forward P/E. Dive into our free research report to see why there are better opportunities than KD.
CoreCivic (CXW)
Market Cap: $1.95 billion
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE:CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Should You Dump CXW?
- Number of average available beds has disappointed over the past two years, indicating weak demand for its offerings
- Earnings growth underperformed the sector average over the last four years as its EPS grew by just 1.9% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.2 percentage points
CoreCivic’s stock price of $19 implies a valuation ratio of 15.2x forward P/E. To fully understand why you should be careful with CXW, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.