(12) Aggressive Accounting Practice
It is one of the most ridiculous & tricky ways to identify and avoid value traps in stocks. Aggressive or dubious accounting practice can make any cheap stock to appear favorable to investors.
Such companies may show strong balance sheet & cash positions to attract stock investors towards their stock. If a company is appearing cheap on the basis of EBITDA while ignoring restructuring charges then you must stay away from it.
You need to be careful enough to prevent yourself in getting trapped in false value stocks.
(13) Excessive Revision Of Earnings Estimate
It is one of the most common & tricky ways to identify and avoid value traps in stocks. Management of a company often put forward business guidance & earning estimates for its stakeholders.
If management is unable to forecast its quarterly earnings estimate, or missing its financial goals, or excessively revising its earning forecast then their may be some serious problem with the management & company as a whole.
A company should be efficient enough to fix such problem as early as possible but if unable to do so then stock prices may fall significantly.
Sometimes, analysts are also found to be quite lenient and usually revise their estimates for a company to much lower levels.
It is usually done to provide company enough room to beat their estimates. You should be cautious enough to analyze value trap stocks before it is too late.
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