Saturday, December 2, 2017

5 Methods To Avoid Value Traps ....


Courtesy : Investopedia

In essence, value investing is the practice of identifying financially sound companies with solid future growth prospects that are available at attractively low valuations, with the company's stock trading below its intrinsic value. Some value investors have been drawn into value traps, in which they buy into stocks that may be low priced but that are not genuinely undervalued and whose stock prices may fall substantially further due to company or industry specific conditions that are long-term problems rather than just temporary setbacks.
There are relatively low-priced stocks that are genuine value investing opportunities, and then there are stocks that are low-priced value traps. Learn to look beyond just a low price and maintain a focus on strong fundamentals for a company and the industry in which it is engaged. Here are five warning signs that a stock may be a value trap rather than a real value investing opportunity.

1) A Bad Business Model


No matter how promising a company's statements on its website may seem or how attractively low its stock price may appear, be wary of any company that doesn't have a business model that is both easily understandable and clearly aimed at being profitable. If you can't easily and clearly see how the company's business model should lead to success and profitable revenues, it's probably best to avoid the stock no matter how temptingly low the price may look. Be especially wary of companies that rely on outdated technology. In today's rapidly changing economic world, a company offering a product or service that is outdated, or soon to be outdated, is in serious trouble. This kind of trouble usually results in a stock price that just continues to drop. Technological obsolescence has led to the downfall of many a business in the past couple of decades.

2) Price Too Cheap Compared to Earnings


The price-to-earnings ratio (P/E) is a good financial metric to consider when determining whether a stock is really a bargain or a value trap. If a company's stock price has dropped to the point where it is unreasonably cheap in comparison to earnings, this is often a strong indication that the company is fundamentally unsound. Since the market generally prices stocks in relation to future expected cash flows, consider the forward P/E ratio as well as the trailing P/E.

3) Too Much Debt


Many promising businesses have been undone and sent into bankruptcy by allowing themselves to become overly leveraged. The adage is true that it's much easier to pile up debt than it is to get rid of it. If a company's revenues and stock price have declined, the interest on its outstanding debt becomes a larger percentage of revenues and income. When this happens, the debt usually becomes increasingly difficult to manage. A company carrying a dangerously high debt load has very little room for error or even for minor setbacks in the marketplace. It's probably best to shy away from stocks that have substantially higher debt to equity (D/E) ratios than the industry average.

4) Lack of Competitive Advantage in the Marketplace


Virtually every market sector is increasingly competitive. If you can't look at a company and clearly see that it has a competitive advantage, then it very well may not have one. Consider potential sources of market advantage, such as unique products or proprietary technology, brand identity, less expensive suppliers or production costs, cash reserves or location. Unless a company has at least one competitive advantage that should allow it to succeed on a higher level than its competitors, it is not likely to thrive and grow, and that applies to the value of its stock as well.

5) Lack of Insider Buying


One of the clearest warning signs to stay away from a stock is a lack of insider buying or, even worse, signs of substantial insider selling. Include hedge fund and mutual fund managers in the group of insiders, and be careful if the percentage of funds holding a stock is dropping substantially. If company insiders aren't anxious to scoop up shares of the stock at what looks like a bargain price, then the stock probably isn't such a bargain after all.


46 comments :

  1. sir,your view on mirc electronics please

    ReplyDelete
  2. Sir what is your view on sanco industry

    ReplyDelete
  3. Dear VP Sir, Can you please throw some light on Mcleod Russel (India).

    ReplyDelete
  4. Hi sir, Please let me know your views on Lupin at current level. Insider buying is happening these days. Thanks.

    ReplyDelete
    Replies
    1. Prefer an SIP for passive investors.

      Delete
  5. Dear sir
    Do u track any company from fragnance & flavour industry..(sh kelker)..any view on this.

    ReplyDelete
    Replies
    1. Camphor and allied products earlier suggested @ Rs.182 from this sector which is currently trading around Rs.1200 . Neutral at CMP .Not tracking any other companies from this sector.

      http://value-picks.blogspot.in/2014/03/camphor-allied-products-ltd-joining.html

      Delete
  6. Sir, please give your views on Virinichi. Thanks n regards

    ReplyDelete
    Replies
    1. Started to track only recently, seems one of their product performing reasonably well in overseas market.

      http://www.qfund.net/

      Delete
  7. Sir,
    Your views on Indbank Merchant Banking Services Ltd and TGV SRAAC Ltd(BOM:507753).
    Are they techincally strong enough ?

    ReplyDelete
  8. Dear sir, your views on best steel logistics & rain industries ??

    ReplyDelete
    Replies
    1. No change in previous opinion on Best Steel

      Not tracking Rain Ind.

      Delete
  9. sir , your view on shriram EPC please

    ReplyDelete
    Replies
    1. Shriram EPC's valuation is almost double of Ramky's . Sriram EPC market cap is above Rs.2300 Cr where Ramky is still trading around Rs.1300 Cr . I would prefer to stick with my old pick.

      Delete
  10. Sir what is view about trigyn tech and jp associate

    ReplyDelete
  11. sir , multibase , is it sustainable to do the current growth with crude price trajectory please

    ReplyDelete
    Replies
    1. Their recently introduced products showing good margins , I hope they have reasonably good pricing power .

      Delete
  12. Please your view about avanti feed for long term

    ReplyDelete
    Replies
    1. Avanti feed already turned as a 100 bagger from suggested level , neutral at CMP

      Delete
  13. Sir, Do you track Himalya International?

    ReplyDelete
    Replies
    1. Tracked earlier but management could not keep the promises they given so far , now company changing its strategy and shifting focus to local market . waiting to see how they succeed in their new efforts.

      Delete
  14. Sir, Could you kindly provide your view on the following stocks
    1) Sampre Nutrition
    2) Deepak Nitrite Limited
    3) Rajoo Engineers
    4) Jaipan Industries
    5) Confidence Petroleum

    ReplyDelete
    Replies
    1. Deepak Nitrite is the only stock tracking which earlier suggested at lower level before stock split.

      Delete
  15. wt r your view on logistic sector. any pick from this sector???

    ReplyDelete
    Replies
    1. Reasonably good growth possible along with the recovery in economy , but as an investment , most of the stocks already moved.

      Delete
  16. sir , are you tracking hcl infosystem

    ReplyDelete
  17. Hi VP Sir,
    What are your views on SRS.

    Thanks,

    ReplyDelete
  18. Hello Sir your view on Future consumer limited

    ReplyDelete
  19. Hi sir, Please let me know your views on Munjal auto.

    ReplyDelete
  20. Sir your view on Prakash Industries.

    ReplyDelete
    Replies
    1. Seems worst is over , suggested few years back @ Rs.61

      Delete
  21. Dear sir
    Please provide your views on Acrysil India.

    ReplyDelete
    Replies
    1. Acrysil is a company suggested @ Rs.85 ( adjusted to last bonus) .Prefer to hold @ CMP Rs.580

      Delete
  22. Hello VP sir..Im wondering why Websol is struggling so much to publish results by new standards. Makes me think that there could be too much fudging of numbers and they are not able to adjust to it with new accounting standards.

    ReplyDelete
    Replies
    1. Please don't hold any stock without self conviction.

      Delete
  23. Dear Valuepick sir, can pl give your views on Kilpest and Phyto chemicals. Thanks in advance.

    Gargi

    ReplyDelete
  24. Dear VP sir
    Thank you for all the concepts that you share, it’s really helping me to realign my portfolio.
    I have to thank you for Amulya leasing also.
    What is your view on jain irrigation and kcp ?

    Regards

    ReplyDelete
  25. Sir do u track ITL industries, Intense technologies ?

    ReplyDelete
  26. Sir are you tracking capital first

    ReplyDelete

Followers

Tweet TopOfBlogs