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The Key to Spotting a Value Trap

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  • (0:20) - Is Growth Still Out Performing Value Stocks?
  • (3:40) - Stock Screener: What Is a Value Trap?
  • (6:50) - Tracey’s Top Stock Picks 
  • (16:10) - Takeaways on Spotting A Value Trap: CC, PHM, MIK, GM, SNX, GE
  •             Podcast@Zacks.com

 

Welcome to Episode #104 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

Interest in value stocks is on the upswing even though growth stocks continue to out perform value.

When are Stocks a Value?

Normally, you’d have a cheap stock when it has a low P/E or other low value fundamentals like price-to-book and price-to-sales ratios.

But solid value fundamentals aren’t the only criteria for determining a value stock versus a value trap.

The Key to Spotting a Value Trap

The one thing that separates the value stock from the trap is earnings growth.

A stock could be dirt cheap, but if earnings are declining, that’s probably the reason its so cheap. The more intriguing scenario is when the stock is cheap but earnings are on the rise.

Investors should ask themselves:

Is the company expected to grow earnings this year and next?

Are analysts raising estimates, instead of cutting them?

Tracey screened for cheap stocks and then picked 5 of them to see if she could spot the value stocks from the value traps.

Value Stock or Trap?

1.       Chemours (CC - Free Report) has a forward P/E of just 8. This chemical giant is dirt cheap. It recently saw double digit growth across all key metrics as sales rose 14% in the second quarter. Are the numbers too good to be true?

2.       Pulte (PHM - Free Report) has been cheap for most of 2018. Most of its homebuilder competitors are also cheap stocks. Wall Street has turned its back on the industry this year due to the Fed’s plan to raise interest rates several more times this year which is likely to raise home mortgage rates. Pulte has a forward P/E of just 8.3 and a price-to-sales ratio of only 0.9. But are earnings estimates on the rise or are they falling?

3.       The Michaels Companies (MIK - Free Report) is one of the cheap retail stocks. Its forward P/E is just 8.8 and it has a P/S ratio of only 0.7. While it won’t report earnings until the end of August, 1 estimate was revised in the last week. Is the analyst bullish or bearish?

4.       General Motors (GM - Free Report) has been cheap for some time. It’s forward P/E is just 6.2 and it has a P/S ratio of only 0.4.  It has been rewarding shareholders with a juicy dividend, currently yielding 4%. But possible auto tariffs loom on the horizon. Is it a true value or a trap?

5.       General Electric (GE - Free Report) isn’t as cheap as some of the others with a forward P/E of 13.5. However, it does have a value P/S ratio of just 0.9. Everyone knows what its issues are in 2018 but will it break out of the slump in 2019 and beyond?

What else should you know about value stocks versus value traps?

Tune into this week’s podcast to find out.

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