(10) Cash Flow From Operations
It is one of the most popular & tricky ways to identify and avoid value traps in stocks. You can’t detect a multibagger stock by just looking toward earnings of a company.
It is because it can be manipulated quickly through various accounting tricks. But, cash flow can’t be manipulated. You need to make sure that company is showing stable or increasing cash flow from operational activities.
A stock at cheaper valuation along with negative cash flow is not an investment pick. It is purely a possibility of a value trap.
(11) Non-Sustainable Competitive Advantage
It is one of the best & tricky ways to identify and avoid value traps in stocks. A cheaper stock can rebound to become a multibagger stock. It is possible only if company has some sustainable competitive advantages over its peers.
You need to stick to companies that have presence of new designs, market share, latest technology, as well as new products & services.
A company without sustainable & long term competitive advantages can only create value traps rather then value investment.
- Value Traps: Shutterstock