The cyclical nature of the stock market means that even popular stocks trade at a discount from time to time. Long-term value investors recognize that market downturns are typically only temporary, and they swoop in to buy stocks at a discount. However, sometimes a stock’s downturn is more than just a cyclical lull and can be a sign that something is critically wrong with the company’s underlying business. In these cases, a struggling stock may appear to offer a compelling value when it’s actually a value trap. Here are a few ways to recognize and avoid value trap stocks.
- Declining Revenue
Market price-to-earnings multiples expand and contract over time, and these fluctuations can account for much of a stock’s short-term price movement. However, a company with consistently declining revenue often has a major problem with its business. Sears Holding Corp (SHLD) shares are down 77 percent in the past five years, but the company’s revenue has also steadily declined by 48 percent in that time. Companies with declining revenue can stay profitable for years by cutting costs and relying on business from their remaining loyal customers. Unfortunately, when revenue is disappearing, long-term value is…
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!