Excess Returns, Episode 5: The Double Edged Sword of Avoiding Value Traps

Many value stocks are cheap because they deserve to be. Some of them no longer have sustainable businesses, and as a result their current discounted multiple will look really expensive relative to where their business is headed. These types of stocks are often referred to as “value traps” and value investors do everything they can to avoid them. In this episode, we talk about value traps, why they are impossible to avoid completely, and some… Read More

Value Stocks or Value Traps?

A recent Morningstar  article discusses the risks associated with value stocks, which are now cheaper than ever. The article cites a recent report by BlackRock that issued a “stark” warning: “The market needs to fundamentally reappraise the true value of over-indebted, structurally challenged business models, particularly those that are paying dividends they can’t afford.” So how do investors find real value stocks? The article cites comments from one fund manager, David Keir of TB Saracen… Read More

Finding Industries that Present Investment Opportunities

A recent article in Forbes discusses strategies for finding investment opportunities in out-of-favor industries and avoiding value traps. Here are some highlights from the article: Investors can avoid falling into value traps by ascertaining whether the industry has staying power and if the underlying products are still in demand. Once that is determined, investors should turn their focus to the individual players in a given sector with specific attention to competitive edge, earnings prospects, and… Read More

The Double Edged Sword of Avoiding Value Traps

By Jack Forehand (@practicalquant) —   Value investing is full of pitfalls. It is easy to think that as a value investor all you need to do is buy cheap stocks and eventually the market will come around to your way of thinking, but that just isn’t the way things work in the real world. Many value stocks are cheap because they deserve to be. Some of them no longer have sustainable businesses, and as a result… Read More

Value Trap Warning Signs

Today’s high stock market valuations make cheap stocks attractive, but a recent Bloomberg article warns that the market is “littered with ‘value traps’—stocks that look cheap but never substantially rebound.” The article provides 12 value trap warning signs, as follows: The business is still struggling at the peak of its operating cycle. Company management compensation structures haven’t changed in the face of the stock’s declining performance. The company “dominates a smaller U.S. city. Managers have… Read More

Chasing Dividend Yield Into a Value Trap

In their ongoing pursuit of dividends, investors should be careful not to indiscriminately buy with only dividends in mind, according to strategists at Mellon Capital in this week’s Barron’s. “Building a portfolio of dividend stocks needs to be carried out with precision, research insights, and a meticulous focus on underlying company fundamentals,” the article says. Dividends, they write, are an important metric to consider, but if over the past ten years an investor bought only… Read More

How Value Traps Can Pull You In and Spit you Out

A post in Institutional Investor highlights a “value trap” that arises when stocks appear cheap but are within a sector that “experience[s] high levels of asset growth [then] collapse.” Examples include U.S. homebuilders just prior to the financial crisis and, more recently, the mining and energy sector. Edward Chancellor (former GMO pro) of Marathon Asset Management suggests that “businesses in sectors that have experienced rising levels of [capital expenditures or capex] and supply . .… Read More