Joined: 01/Jan/2006
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Posted: 03/Sep/2009 at 7:13am
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.
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Joined: 29/Dec/2007
Location: India
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Posted: 04/Sep/2009 at 12:10pm
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
Joined: 29/Mar/2007
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Posted: 04/Sep/2009 at 3:44pm
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.
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.
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