(16) Growth By Acquisition
It is one of the most significant & tricky ways to identify and avoid value traps in stocks. Growth by acquisition or merger of a company is an important sign of a value trap.
A company with low growth & low P/E ratio when merged with expensive company of high P/E ratio is likely to be expensive as a whole.
You can not predict the new valuations of such false bargain stocks only on the basis of old financial statements provided by the management.
(17) Highly Regulated Industries
It is one of the most tricky ways to identify and avoid value traps in stocks. A company working in highly regulated sector of business may generate less profit as compared to unregulated sector of business.
A highly regulated sector is often associated with high fees and regulation cost. It decreases the possibility of increase in share price.
You should prefer to invest in unregulated sectors or less regulated sectors. This will help you to prevent yourself from being stuck in value trap investment.
- Value Traps: Shutterstock