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Steer Clear of These 5 'Value Traps'

February 29, 2012 | About:
In this article, I am going to research and give my opinion on the five selected so-called “value traps” stocks through my analysis and data supported opinions. I selected these stocks because their quantitative and qualitative attributes will be revealed to show how they are “value traps” and not “value” stocks. Here are my findings:

First Solar (FSLR) is a perfect example of how its past performance and current attributes are a poor indicator of its future results. According to today's trading price of $41 per share, one would certainly think it has hit a low and has a lot of upside based on its 52-week trading range of $43 to $169. However, if one looks at the analyst's one-year target price of $44, one would easily see there is not much of an upside to it, especially a year out. Future prospects for solar companies such as First Solar, Trina Solar, and Yingli Green Energy is quite bleak because analysts and industry insiders credit solar company stock price runs to generous government backed funding and tax credits. Moreover, analysts believe that during the height of solar stock run-ups, it was due more so to government stimulus and not organic market demand, proving future gains will be more speculative going forward.

In my opinion, these are value traps because a good portion of the growth was stimulated by government intervention, not real demand, providing less demand in the future. Also, more and more governments worldwide are facing budget cuts and shifting funds towards more social programs as well as facing political pressure to not spend money on solar, which is what some believe solar is.

Research In Motion Limited (RIMM) is another value trap that you should seriously consider before hitting the "buy” button. Some investors might believe this stock is a “value buy” versus actually a value trap because they would see the stock's current price of $14.65 at the time of this writing and think there is double-digit room for growth based on the 52-week range of $13 to $69. It's silly that some people might go on that prediction, similar to being a “chartist” or simply relying on past performance. What a stock does in the past has little, if any influence on its future performance.

Another reason it has gone from a value stock to a value trap is because the board of directors at RIM replaced two long-term CEOs with a CEO with less experience at RIM along with its steep loss of market share, which went from 44 percent to 10 percent in the past 24 months.

This restructuring is very important to its future short and long-term profitability because in the past they almost had half the market share and could bank on doing well for the most part. Now, this defines a company that is a value trap because the company only has 25% of its original market share. Coupled with a new CEO who has his own style, regaining market share will come at a great short-term cost, and that is something that is not guaranteed.

Nokia (NOK) is, in my opinion, another former value stock that has been hollowed out into a value trap. By simply looking at the one-year target of Nokia's stock being $6.26 compared to its last active trade of $5.56, one is looking at a $0.70 per share profit, paltry, especially if one considers the true rate of inflation at or past 10%. Because the actual rate of inflation last year is what this year's performance is expected to do, this stock will literally trap the value of your investment and is not a wise choice, unless you want to waste your time and not make money.

Moreover, Nokia is taking a huge gamble with shareholders' money by risking its investment in selling a phone for $900 dollars! I would never fathom spending anything close to that for a cell phone, smart-phone, any kind of phone! While I may sound frugal, more and more people are forced to become frugal due to the bad economy that more and more people see no end in sight to. Since Nokia takes too many risks with other people's money and does not make the case for profitable future quarters, it's no value for me!

Sprint Nextel Corporation (S) in my opinion is yet another value trap stock because while it appears to have room for growth, there are many factors that prove otherwise. Comparing its bid on the day this piece was written, the intra-day quote was $2.23, having a $3.69 one-year target estimate. Coupled with the 52-week range varying from $2.10 to $6.45, all of these factors make it seem very appealing, but far from the truth.

I say this because my personal belief and research tells me that there is no more value left in the stock from direct negative news stories. For example, while Sprint activated 1.8 million iPhones in the last quarter of 2011, Verizon and AT&T activated 4.3 and 7.6 million iPhones, respectively. These statistics clearly show that Sprint has lower value than its competitors and backs up my opinion that Sprint is a value trap stock.

Sprint also will have a hard time staying profitable while providing data to its customers at a competitive rates compared to AT&T and Verizon, because it will cut Sprint's investment fund to expands it higher speed 4G network, further irritating existing customers with slower speeds and keeping new ones away. Based on all of these factors Sprint has provided lower value and will continue to offer less and less services into order to stay afloat because it is a value trap stock.

Bank of America Corporation (BAC) is the last value trap stock that will be covered and detailed whose future will not produce stockholders any profit. According to the analyst's one-year target estimate, this stock is only forecast to hit $9. This is especially bad news for value investors because at the day of writing, the stock price is at $7.95, providing investors a projected 12% or return, even though in 2011 the true rate of inflation is at or past 10%.

Bank of America, along with Citigroup, JPMorgan Chase, and other undisclosed banks have all been sued today, Feb. 22, 2012, by Sealink Funding Ltd., alleging negligent and fraudulent misrepresentation of the bank's part in regards to determining risk regarding purchased mortgage backed securities. This lawsuit will certainly damage Bank of America's image and stock price in the short-term and potentially in the long-term. I believe have this, and other presumed lawsuits against one's company is no way to improve investor, analyst, and/or public confidence in one's future stock value.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

Visit Dividend King's Website


Rating: 2.2/5 (25 votes)

Comments

Moneymaker5o1
Moneymaker5o1 - 2 years ago
No wonder this article got 1/5 rating with great explanation and analysis like this:

"According to the analyst's one-year target estimate, this stock is only forecast to hit $9."
pravchaw
Pravchaw premium member - 2 years ago
Perhaps you can explain why Prem Watsa is accumulating RIMM?

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