Welcome to Episode #141 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.
It’s time to take a look at cheap stocks again.
Just because a company has a low P/E ratio, P/S ratio or Price-to-Book, doesn’t mean that it’s necessarily a value stock.
There are plenty of companies that have what look like classic value fundamentals, only, when you drill down, they actually are value traps.
How can you tell the difference between a value stock and a value trap?
While the company may have classic value fundamentals, investors need to look beyond the P/E ratio at the “E” of the P/E.
Are the earnings expected to rise, or decline, year-over-year?
If they are on the decline, the stock is likely to be a value trap because that means there is something happening at the company that is causing it to struggle to grow.
Investors want earnings growth, not decline. The “E” in the P/E should not be on the decline.
In past podcasts, General Motors GM and General Electric GE have both shown up as cheap stocks but they were also value traps thanks to falling earnings.
Has anything changed in 2019?
General Motors is still cheap, with a forward P/E of just 5.6. Berkshire Hathaway has been adding to its position in the stock.
Have earnings turned around?
General Electric used to be cheap but the shares have surged 41% in 2019 and it doesn’t even qualify as a value stock, at least based on its P/E ratio, which is now 17.
1. Chemours CC has been featured on prior podcasts. It’s dirt cheap with a forward P/E of 5.7. It also pays a dividend that is now yielding 4.1% as the shares are down 41% in the last month. Is it cheap or a trap?
2. Camping World CWH said in its recent earnings report that it saw improvement in sales trends starting in mid-March that continued into April and early May. But shares have sunk 18% in the last month. Shares are super cheap, with a forward P/E of just 7.3. Is it a trap?
3. L Brands LB which is Victoria’s Secret, hasn’t reported its earnings yet. But one analyst has already revised his estimate lower for the quarter and full year ahead of the report. That’s a bearish sign. The shares are down 13% year-to-date and remain cheap, with a forward P/E of 9.5. Is it a good value stock or a trap?
It’s easy to get sucked into value trap stocks.
What else should you know about how to spot them?
Listen to this week’s podcast to find out.
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