Every beaten down stock is not a good investment opportunity. These tricky ways to identify and avoid value traps in stocks can help you.
Smart investors are always looking to buy value stocks or multibagger stocks of a beaten down-company. These are stocks that are trading at low financial ratios such as low readings on price-to-earnings, price-to-book-value and price-to-cash flow ratios, etc.
A true value stock can generate huge profits for equity investors. But sometimes, stocks are trading at cheaper valuation for an extended period of time. It is because they actually deserve to be cheap as they have little promise & perhaps no future.
A value trap is a false bargain stock that trades at lower valuations after large price fall. These stocks trades low as compared to its financial ratios, competitors and other indicators. But, they fails to recover even after long period of time. Sometimes, they can even go for bankruptcy.
You must learn & understand ways to differentiate solid value stocks from value traps by determining whether its troubles are temporary or permanent in nature. Here are 20 tricky ways to identify and avoid value traps in stocks:
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(1) Absence Of Catalyst
It is one of the most significant & tricky ways to identify and avoid value traps in stocks. Absence of catalyst is an important sign of value traps in stocks. A company & its stocks can grow only in presence of a suitable catalyst.
Some of the signs of absence of catalyst include absence of new products & services, absence of new marketing strategies, shake-up of top level executives, lack of order backlog in a company
When there is lack of catalyst, you can’t expect good growth. The earning potential of such companies will be diminished in the long run.
A false value stock can stuck your investment for indefinite amount of time or even for ever. Thus, you should completely avoid such stocks
- Value Traps: Shutterstock