Value Traps
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Equity Valuation Techniques
Forum Discription: While valuing equities no individual technique works. Mostly it is a combination of techniques. Discuss the various techniques in equity valuation ranging from PE to RoE to Market Cap
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=2360
Printed Date: 20/Apr/2025 at 5:49pm
Topic: Value Traps
Posted By: subu76
Subject: Value Traps
Date Posted: 03/Sep/2009 at 9:25pm
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Though the market has appreciated a bit I am sure a lot of us agree this is as good a time as any to build a long term portfolio. (Definitely better than 2007)
Value traps I am told is a long term investor's worse nightmare.
Please post your articles/thoughts/past experience to guide other Teddities
If there is a similar thread I'd request Basant Ji to delete this one.
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Replies:
Posted By: subu76
Date Posted: 03/Sep/2009 at 9:27pm
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I am posting this article related to value traps which I found interesting.
There were 5 categories enumerated:
1. Quarter Life crisis.
2. Soaring cyclical
3. The small cap earnings grower
4. The too high yielder
5. The unopened book
http://www.msnbc.msn.com/id/32672526/ns/business-motley_fool/ - http://www.msnbc.msn.com/id/32672526/ns/business-motley_fool/
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Posted By: subu76
Date Posted: 03/Sep/2009 at 9:29pm
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I also have one question for Teddities...
Does the existence of value traps mean that an investor should look at past pricing patterns before making any investment?
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Posted By: Monkey
Date Posted: 03/Sep/2009 at 9:48pm
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One very famous value trap is "Holding Company" model. There are many instances where share price of holding company is at good discount to the sum of market cap of underlying companies and some cash or other assets thrown in addition. It is very tempting to buy. However, this value never gets encashed and stock remains at discount forever. Other very similar value trap is investment companies which are quoted at good discount to market value of underlying portfolio. Here also this discount remains forever.
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Posted By: bharti
Date Posted: 03/Sep/2009 at 11:11pm
| PSU Banks have generally been a value trap for long! |
Posted By: subu76
Date Posted: 03/Sep/2009 at 11:21pm
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From some articles on the web... High Insider ownership can also sometimes cause value traps esp if the organization is not doing well.
(As it prevents management from being changed)
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Posted By: subu76
Date Posted: 03/Sep/2009 at 11:22pm
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On Monk's holding company's post:
A good discussion on holding companies and their discounts is here
http://www.theequitydesk.com/forum/forum_posts.asp?TID=972 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=972
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Posted By: Monkey
Date Posted: 03/Sep/2009 at 11:53pm
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Thank you sir for the link!!
Since I am relatively new to this forum, I am not aware of many past discussions on various subject.
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Posted By: subu76
Date Posted: 03/Sep/2009 at 12:19pm
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As usual a lot of our analysis will be backward looking.
If Brittania does not increase it's Net profit anytime soon it will be termed as a value trap.
3M is a value trap which folks already discussed/
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Posted By: basant
Date Posted: 03/Sep/2009 at 7:13am
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Very interesting topic. The initial post has comprehensively covered the value traps. Basically it is a case of a cheap stock remiaing cheap with no outside/inside catalyst for a re-rating! But some people like to play the game that way. I know many investors who hold VST just because it is a 7% yield stock but the difference to making money is in trying to identify a value trap in foresight rather then hindsight. Generally a high quality brand as a sector leader has the least chance of becoming a value trap. The biggest value traps are found in companies that are not leaders of the sectors they operate in. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: nitin_jagtap
Date Posted: 04/Sep/2009 at 12:10pm
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Other than the almost risk free dividend earned, money in value trap stocks can be made when you buy them when they are very cheap and sell them when they are cheap. These stocks may seldome become fairly valued or overvalued in the entire life time ------------- Warm REgards Nitin Jagtap |
Posted By: subu76
Date Posted: 04/Sep/2009 at 2:44pm
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So it seems that value traps...like other not so great selections are stocks of companies which are not showing good enough top/bottom line growth. Also, they are neglected by the market (no PE rerating) as these are second/third line companies.
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Posted By: subu76
Date Posted: 04/Sep/2009 at 2:45pm
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To build more on my understanding of Nitin's point...
Value traps do not lend themselves to buy and hold.
You need to buy and sell ..... say buy at 7% yield and sell at 4% yield....
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Posted By: smartcat
Date Posted: 04/Sep/2009 at 3:44pm
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Any stock which seems to be cheap (low P/E with high dividend yield) but has no significant earnings growth in the past few years is a value trap.
That's why PSU banks are not value traps - they grow their EPS and net profits every year. And when that happens, the stock price too keeps going northwards. Check the 10 year stock price graph of any significant PSU bank, and you'll know what I mean.
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Posted By: subu76
Date Posted: 04/Sep/2009 at 3:54pm
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I see..... SBI we know of already. I'll check a few other banks.
I think Vivek made a pile on some of the PSU banks.
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Posted By: nav_1996
Date Posted: 04/Sep/2009 at 5:16pm
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When we discuss value traps it is important to remember that it is better to be stuck with value traps yielding div rather than get into someting which looses 90% - e.g. vishal retail, silverine, dsq. They appeared as classical growth stories at their peak.
Having said that a novice investor is likely to do better with classical value traps rather growth stocks. It also depends on your temprament. I made money with IDBI bank but lost with HDFC bank. I made money with Sundram Fin but lost with HDFC. I made money with Trent but lost with Pantaloon. When you buy a stock which you consider value based on your analysis, it helps you hold the stock over a cycle of ups and downs. |
Posted By: kulman
Date Posted: 04/Sep/2009 at 6:12pm
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While on the subject, another most common and important trap that sucks investors is when they buy at a price that 'discounts all the expectations'. e.g. buying in euphoric times, buying most popular/most discussed/flavour of the season types etc. Needless to say, the returns on such investments are mostly horrendous and in majority of the cases can't even match Post Office Deposit rates. |
Posted By: basant
Date Posted: 04/Sep/2009 at 7:13pm
That is a simple trap. No value there .
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: tigershark
Date Posted: 04/Sep/2009 at 6:10am
the us govt simply changed trap to TARP just see how smart they are
------------- understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things |
Posted By: kulman
Date Posted: 04/Sep/2009 at 7:37am
Yeah... (This simple Trap + CNBC Crap) = Mungeri http://www.theequitydesk.com/forum/forum_posts.asp?TID=1099&PN=1 - laal, the poor Chap
 No wonder America is the strongest and the smartest. I saw this written outside a church: God lives in US ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Hitesh Shah
Date Posted: 04/Sep/2009 at 8:10am
No matter how much others rubbish that country (or its successive governments), it will remain superior and a magnet for those with initiative. ------------- |
Posted By: basant
Date Posted: 04/Sep/2009 at 11:05am
Toh kya Bhagwan toh Bharat mei hai ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: kulman
Date Posted: 04/Sep/2009 at 11:28am
 And as they say on Dalal Street: भाव ही भगवान हैं ! ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: tigershark
Date Posted: 05/Sep/2009 at 1:57pm
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god lives in the usa and so does goldman sachs
------------- understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things |
Posted By: Hitesh Shah
Date Posted: 05/Sep/2009 at 2:12pm
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And so does Arjun Narayana Murthy. ------------- |
Posted By: manish_okhade
Date Posted: 05/Sep/2009 at 8:52pm
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In my humble opinion value lies in all stocks. People mostly confuse that if they buy cheap stock and wait till it becomes expensive. True but if you play this game with lesser known companies then its a risk and outcomes is more of a gamble. Coomon investor does not know the dynamic of board room games.
I feel its always preferable to be patient for growth and solid stocks to fall to the level that it becomes a value. Of course again to what extent it falls to become a value is a very subjective matter and definitly calls for expertise.
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Posted By: prabhakarkudva
Date Posted: 05/Sep/2009 at 11:16am
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I think most value traps would be when a business is available for less than what it was available anytime before in its history and people find it cheap at a given time when compared to its historical PE.This leads them to believe that the prices will revert back to normal. The trap lies in the fact that there is a real change in fundamentals that the market is pricing in, but the investor is not able to figure that out and keeps waiting almost forever . ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: Vrishali
Date Posted: 05/Sep/2009 at 11:59am
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From http://www.investopedia.com/terms/v/valuetrap.asp - Investopedia What Does Value Trap Mean? A stock that has experienced a large price depreciation and is mistaken to be a value stock. The Low Multiple Value Trap Companies that have been trading at low multiples of earnings, cash flow or book value for an extended period of time are sometimes doing so for good reason - because they have little promise - and possibly no future. Lack of Catalysts Companies and stocks need catalysts in order to advance. If a company doesn't have new products on the horizon or expect to show earnings growth or momentum of some kind,consider avoiding it. Small Floats Companies with a small float or with few shares that trade in the public domain are unlikely to garner institutional attention because those investors will have trouble acquiring and ultimately disposing of large quantities of stock. When institutions cannot participate in a stock, the shares tend to languish; by extension, they may become a "value trap". Tightly Held Companies Many institutions and entities that can move stocks (ie. mutual funds and hedge funds) will usually not get involved in a company if it has a high percentage of insider ownership. If insiders own a high percentage of the shares, the investing institution may not be able to influence the board of directors or to have a say on corporate governance issues. This lack of institutional interest could cause a stock to seriously languish Bottom Line Although a company may seem like an attractive investment candidate because of a low multiple, unless it has catalysts on the horizon, interested institutional investors, insider incentives and ample floats, the stock could lead you into a value trap. ------------- "Diversification is a protection against ignorance. It makes little sense for those who know what they're doing." - Warren Buffet |