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Welcome to Episode #293 of the Value Investor Podcast.
Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.
These are tricky times for value investors. A lot of stocks look cheap, either on a P/E basis or, for the growth stocks, because they have sold off anywhere from 20% to 60% this year.
But are these stocks truly “cheap” or is it a trap?
Definition of Value Stock Versus a Value Trap
Just because a stock has a low P/E, that doesn’t mean it’s a value. The key to determining whether or not a stock is a value or a trap is to look at the earnings estimates.
Are the earnings expected to rise, or fall, next year?
A value trap is usually a company that has a low P/E, or that has sold off big, but where earnings are expected to decline next year. If earnings are declining, the company isn’t as “cheap” as you think.
Roblox, the online entertainment platform that is beloved by kids and teens, recently reported second quarter earnings results. Daily Active Users (DAU) rose 21% to 52 million and jumped again in July 2022 to 58 million, up 26% year-over-year.
Roblox revenue also rose 30% to $591.2 million. But it missed on earnings and earnings are expected to be negative this year and next year.
Shares of Roblox are down 55% year-to-date. Is it a value or a trap?
Pinterest has been on a wild ride since the coronavirus pandemic began in 2020. Shares rallied during the lockdowns and restrictions as people were inside and connecting through their phones.
Earnings rose as well but in 2022, as the global economy reopened, Pinterest’s monthly active users fell and there were worries about social media advertising slowing.
Pinterest shares peaked around $89 a share and are now trading around $22. They are down 61% in the last year.
Signet Jewelers seemed to be defying the expectations that consumers would pull back on discretionary purchases until Aug 2022 when it cut full year fiscal 2023 revenue guidance to a range of $7.6 billion to $7.7 billion from its prior guidance of $8.03 to $8.25 billion.
Signet said it saw further deterioration in consumer spending, including at higher price points, in July.
Shares of Signet are down 26% year-to-date. It trades with a forward P/E of just 4.8.
Warren Buffett and Berkshire Hathaway continue to add to their already sizable position in Occidental Petroleum in 2022. Berkshire now owns over 20% of the company.
In the second quarter, Occidental Petroleum saw free cash flow of $4.2 billion. It reduced its debt by 19% and started a big share repurchase, buying $1.1 billion in shares through Aug 1.
Occidental Petroleum shares have stalled the last 3 months, gaining just 9.4% in that time. It trades with a forward P/E of just 5.9.
Micron has been featured on the value or value trap podcast many times over the years as the stock has often had a low P/E and the semiconductors are a popular industry with investors.
Micron has also warned on guidance twice in the last 5 weeks as inventories have risen. It’s a Zacks Rank #5 (Strong Sell).
Micron is cheap with a forward P/E of 6.9.
But is it a value or is it a trap?
What Else Do You Need to Know About Value Stocks Versus Traps?
Tune into this week’s podcast to find out.
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Cheap Stocks: Values or Traps?
Welcome to Episode #293 of the Value Investor Podcast.
Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.
These are tricky times for value investors. A lot of stocks look cheap, either on a P/E basis or, for the growth stocks, because they have sold off anywhere from 20% to 60% this year.
But are these stocks truly “cheap” or is it a trap?
Definition of Value Stock Versus a Value Trap
Just because a stock has a low P/E, that doesn’t mean it’s a value. The key to determining whether or not a stock is a value or a trap is to look at the earnings estimates.
Are the earnings expected to rise, or fall, next year?
A value trap is usually a company that has a low P/E, or that has sold off big, but where earnings are expected to decline next year. If earnings are declining, the company isn’t as “cheap” as you think.
5 Cheap Stocks: Are They Values or Traps?
1. Roblox (RBLX - Free Report)
Roblox, the online entertainment platform that is beloved by kids and teens, recently reported second quarter earnings results. Daily Active Users (DAU) rose 21% to 52 million and jumped again in July 2022 to 58 million, up 26% year-over-year.
Roblox revenue also rose 30% to $591.2 million. But it missed on earnings and earnings are expected to be negative this year and next year.
Shares of Roblox are down 55% year-to-date. Is it a value or a trap?
2. Pinterest (PINS - Free Report)
Pinterest has been on a wild ride since the coronavirus pandemic began in 2020. Shares rallied during the lockdowns and restrictions as people were inside and connecting through their phones.
Earnings rose as well but in 2022, as the global economy reopened, Pinterest’s monthly active users fell and there were worries about social media advertising slowing.
Pinterest shares peaked around $89 a share and are now trading around $22. They are down 61% in the last year.
Is Pinterest a value or a trap?
3. Signet Jewelers (SIG - Free Report)
Signet Jewelers seemed to be defying the expectations that consumers would pull back on discretionary purchases until Aug 2022 when it cut full year fiscal 2023 revenue guidance to a range of $7.6 billion to $7.7 billion from its prior guidance of $8.03 to $8.25 billion.
Signet said it saw further deterioration in consumer spending, including at higher price points, in July.
Shares of Signet are down 26% year-to-date. It trades with a forward P/E of just 4.8.
Is Signet a value or a trap?
4. Occidental Petroleum (OXY - Free Report)
Warren Buffett and Berkshire Hathaway continue to add to their already sizable position in Occidental Petroleum in 2022. Berkshire now owns over 20% of the company.
In the second quarter, Occidental Petroleum saw free cash flow of $4.2 billion. It reduced its debt by 19% and started a big share repurchase, buying $1.1 billion in shares through Aug 1.
Occidental Petroleum shares have stalled the last 3 months, gaining just 9.4% in that time. It trades with a forward P/E of just 5.9.
Is Occidental Petroleum a value or a trap?
5. Micron Technology, Inc. (MU - Free Report)
Micron has been featured on the value or value trap podcast many times over the years as the stock has often had a low P/E and the semiconductors are a popular industry with investors.
Micron has also warned on guidance twice in the last 5 weeks as inventories have risen. It’s a Zacks Rank #5 (Strong Sell).
Micron is cheap with a forward P/E of 6.9.
But is it a value or is it a trap?
What Else Do You Need to Know About Value Stocks Versus Traps?
Tune into this week’s podcast to find out.