Red Flags To Look Out For In Value Trap Stocks

Red Flags To Look Out For In Value Trap Stocks by George Athanassakos, The Globe And Mail

Few things bring fear in value investors’ hearts than realizing that they invested in a value trap.

A value trap is a stock that looks like a bargain, based on key valuation metrics such as price-to-earnings or price-to-book ratios, but it falls further in price and fails to recover within a value investor’s investment horizon of three to five years and at worst goes bankrupt, either because of a fundamental shift in the company’s business or because of changes in the environment in which the company operates. The changes are not business cycle related, but instead they are secular, structural and mostly...