(8) Insider Trading
It is one of the most hidden & tricky ways to identify and avoid value traps in stocks. Insiders are among those who better understand the real value & future growth prospects of a company.
A truly cheap stock will be purchased not only by value investors but also by insiders. You should safely buy dirty cheap stocks when insiders are also buying the same stocks.
It is perhaps due to the fact that insiders can easily propel the stocks to much higher levels. However, if insiders are not buying cheap stocks in bulk or still selling them.
In such situation, you should also not buy it else you may get stuck in value traps.
(9) Direction Of Company’s Marketshare
It is one of the most wonderful & tricky ways to identify and avoid value traps in stocks. You can easily identify possibility of value traps in stocks by analyzing the direction of company’s marketshare.
A company that is losing marketshare in the industry is a clear indication of competitors taking more benefits than the company. It is usually reflected through declining stock valuations.
So, once lost company’s market can’t be revived too easily even if the entire economy has turn around.
However, you should be wise enough to differentiate between cyclic decline and secular decline in industry. It is due to the fact that long-term secular decline may create value traps for investors.
- Value Traps: Shutterstock