Introduction to Identifying Value Traps
In what has become part 2 of this two-part series, I simply identified the difference between a value trap versus a value investment. The sole purpose of that video was to illustrate the distinctions between a true value stock versus a value trap. Consequently, I primarily relied on historical data to illustrate that value traps are primarily a function of deteriorating fundamentals most often permanently. In contrast, a true value stock is a stock that can be purchased below its intrinsic value in the present and the future.
In the comment section of the first video, several viewers posed the reasonable question, here is one example:
“Tom Stevelt Your value trap examples do not explain how you would have known that fundamentals were deteriorating without a crystal ball. At the time of your starting red dots everything on the graph looks like a good deal.”
Consequently, I was inspired to do a video on how you could identify potential value traps today. Hint, you do not need a crystal ball, just a little common sense and some good old-fashioned research and due diligence. Therefore, with this video I will illustrate the process of identifying a potential future value trap in advance. One caveat, investors need to be realistic and understand that timing a decision such as this with perfect precision is not only impossible but simultaneously an unrealistic expectation. The central idea is to do as much damage control as you can. As the old saying goes, your first loss is your best loss. As a result, you do not want to make the mistakes that many investors do, of so to speak, watering the weeds. In other words, once you identify a potential value trap your best course of action is to leave immediately.
The companies I will review in this FAST Graphs Analyze Out Loud Video are:
Johnson & Johnson (JNJ), Owens & Minor (OMI), Cigna Corp (CI), FedEx (FDX), Omnicom Group (OMC), J2 Global (JCOM), Dish Network (DISH), Pitney Bowes (PBI), Exxon Mobil Corp (XOM), Primerica (PRI)
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Disclosure: Long JNJ, CI, FDX, OMC, XOM at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.