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How to Spot a Value Trap Investment

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How to Spot a Value Trap Investment

Over the years we have often cautioned investors to beware of penny stocks, especially those that have seen better days. While investing in a grand old name in hopes of a recovery it is important to learn how to spot a value trap investment. This issue came up recently when we wondered what was wrong at Kraft Heinz. As bargains become harder to find in an aging bull market there is a temptation to go bottom feeding in search of an investment miracle. Here is some advice about what to watch out for.

If you are going to invest in Kraft Heinz today you need to know how to spot a value trap investment.
Kraft Heinz Products

Spotting a Value Trap
A couple of years back Bloomberg published a useful article with 12 signs a cheap stock is a value trap.

The historically high price-to-earnings ratios being placed on equities today make cheap stocks even more alluring. That makes sense, but be advised that the market is littered with “value traps” or stocks that look cheap but never substantially rebound.

Any way you cut it, value is profoundly out of favor, and not just in 2017. Although proponents of these investments typically are patient people, the long-term differential is large enough to be worrisome. Over the last 10 years, growth has outperformed value by more than 100 percent in small caps and by 50 percent in large caps.

Thus, knowing how to spot a value trap is doubly important at this time. Here are dozen suggestions from Bloomberg. The ideas are theirs but rewritten by us for the sake of brevity.

Still Troubled at the Top of Its Operating Cycle
The U.S. economy and the vast majority of stocks have long recovered from the 2008 stock market crash and financial crisis. If the company you are looking at is performing poorly in the best of times it may well be a value trap. Something is wrong as is not being fixed or cannot be repaired.

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How to Spot a Value Trap Investment

  1. 1. B y w w w . P r o f i t a b l e I n v e s t i n g T i p s . c o m How to Spot a Value Trap Investment
  2. 2. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Over the years we have often cautioned investors to beware of penny stocks, especially those that have seen better days.
  3. 3. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment While investing in a grand old name in hopes of a recovery it is important to learn how to spot a value trap investment.
  4. 4. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment This issue came up recently when we wondered what was wrong at Kraft Heinz.
  5. 5. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment As bargains become harder to find in an aging bull market there is a temptation to go bottom feeding in search of an investment miracle.
  6. 6. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Here is some advice about what to watch out for.
  7. 7. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Kraft Heinz Products
  8. 8. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Spotting a Value Trap
  9. 9. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment A couple of years back Bloomberg published a useful article with 12 signs a cheap stock is a value trap.
  10. 10. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The historically high price-to- earnings ratios being placed on equities today make cheap stocks even more alluring.
  11. 11. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment That makes sense, but be advised that the market is littered with “value traps” or stocks that look cheap but never substantially rebound.
  12. 12. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Any way you cut it, value is profoundly out of favor, and not just in 2017.
  13. 13. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Although proponents of these investments typically are patient people, the long-term differential is large enough to be worrisome.
  14. 14. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Over the last 10 years, growth has outperformed value by more than 100 percent in small caps and by 50 percent in large caps.
  15. 15. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Thus, knowing how to spot a value trap is doubly important at this time.
  16. 16. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Here are dozen suggestions from Bloomberg.
  17. 17. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The ideas are theirs but rewritten by us for the sake of brevity.
  18. 18. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Still Troubled at the Top of Its Operating Cycle
  19. 19. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The U.S. economy and the vast majority of stocks have long recovered from the 2008 stock market crash and financial crisis.
  20. 20. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment If the company you are looking at is performing poorly in the best of times it may well be a value trap.
  21. 21. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Something is wrong as is not being fixed or cannot be repaired.
  22. 22. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Low Profits but High Management Compensation
  23. 23. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When a company falls on hard times it typically puts the screws to management by cutting salaries and tying compensation benefits to performance.
  24. 24. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When this is not the case, management is milking the company for every last dollar before bailing out.
  25. 25. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment This is a strong sign of the stock being a value trap.
  26. 26. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Lack of Fresh Insights
  27. 27. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When an industry like the U.S. auto industry is centered in one city or area like Detroit, everyone works with and socializes with like-minded people.
  28. 28. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment But, when fresh ideas are needed this can be a real hindrance and create value traps of otherwise strong companies.
  29. 29. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Market Share Continues to Slip
  30. 30. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When someone else starts taking market share away from an old stalwart, you need to see them fighting with all that they have to regain that share and succeeding.
  31. 31. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Otherwise, they have become a value trap.
  32. 32. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Too Many Fingers in the Pie
  33. 33. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Many times a well-established company has many stakeholders such as labor unions, foundations, or old family control.
  34. 34. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The goals of these folks may not be consistent with a good return on investment by those who hold their stock.
  35. 35. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Consider such companies to be value traps until proven otherwise.
  36. 36. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Not Managing Capital Effectively
  37. 37. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment A company that has historically been a cash cow may have gotten by for years by just putting money in the bank instead of reinvesting in R&D, acquisitions, and the like.
  38. 38. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When this company starts to slip it needs to shift gears or it is a value trap.
  39. 39. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment And, the changes in how they manage capital need to be clearly articulated to investors and need to begin to show results.
  40. 40. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Fat and Inefficient Management Structure
  41. 41. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment It is said that when Sears built the Sears Tower that they took up 22 floors for management, each floor a different level.
  42. 42. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment No one was paying attention to how management was being carried out and no one was making changes.
  43. 43. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When a company does not upgrade and modernize how it operates on the day by day and decision by decision level, it becomes a value trap because its competitors will outperform it every day of the year.
  44. 44. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Unrealistic and Fantasy Management Goals
  45. 45. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When a company is in trouble it needs to regroup and it needs to explain those plans to both employees and investors.
  46. 46. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When management’s new goals are simply unrealistic no good will come of them.
  47. 47. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment You can often see this by looking at old financial statements and the goals articulated in previous years and the fact that nothing useful has happened, ever!
  48. 48. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment This situation is a clear sign that the company is a huge value trap.
  49. 49. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The better situation is when management promises a little but delivers a lot on a recurring basis.
  50. 50. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Too Much Debt
  51. 51. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The final nail in the coffin of most struggling companies is that they cannot pay their mounting debts with their dwindling cash flow.
  52. 52. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment No matter how hard they try, how creative they are, and how much they economize, excessive debt is a killer and makes a stock a value trap.
  53. 53. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Muddled Thinking and Poor Insight
  54. 54. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The so-called strategic vision or the company is all muddled or simply lacking.
  55. 55. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When management’s plans for the coming years ramble on and repeat themselves, it is time to consider that stock a value trap, absorb your losses, and move on.
  56. 56. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Split Attention between CEO and Board Chairman Responsibilities
  57. 57. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When it is time to turn around a failing company it takes all of the time and attention that the CEO has.
  58. 58. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When he is spending a third of the time answering to the board of directors when he or she should be making changes from the ground up that is a sign of impending failure.
  59. 59. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Turnarounds need the full attention of the CEO or they become and remain value traps.
  60. 60. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The Takeover Activists Are Nowhere in Sight
  61. 61. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When a company has been mismanaged but has a lot of hidden value, there is always a Carl Icahn or his clone interested.
  62. 62. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment When nobody shows up, that is a clear sign that the company really is a value trap and you should avoid it as well!
  63. 63. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment How to Spot a Value Trap Investment
  64. 64. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The tips provided by Bloomberg are useful in spotting and avoiding a value trap.
  65. 65. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment They all fall into the categories of fundamental analysis and evaluation of intrinsic stock value.
  66. 66. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment While growth stocks have been leading the market in the last few years, there is a definite place for value in your portfolio.
  67. 67. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment The trick is recognizing true and lasting value in an investment by understanding and appreciating how a company makes its money and how it will continue to do so well into the future.
  68. 68. http://profitableinvestingtips.com/stock-investing/how-to-spot-a-value-trap-investment Eastman Kodak

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