(20) Stiff Competition & Decreasing Margins
It is one of the most critical & & tricky ways to identify and avoid value traps in stocks. Some form of competition is always prevailing in almost all types of sectors. However, different industries are affected to different extent even in the same extent.
Therefore, you should not forget to look at the profit margins of a company for a period of 5-10 years. It will help you to analyze the trend of profit margin in a particular sector.
If a company is facing stiff competition in a business segment, its profit margins will decline continuously with time. In such circumstances, the stock price of the company is also likely to decline.
However, the extent of decline in stock price will largely depend on the severity of competition in the sector. It is also important to consider whether the competition is for short-term or long-term basis.
Thus, stocks of such companies with squeezed margins may create value traps for investors.
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