The dip in the U.S. stock market in the past two months has provided market bulls with an opportunity to load up on some of their favorite stocks at discounted share prices. Long-term value investors are searching for the best market deals to buy on the dip, but it’s extremely important to understand the difference between a value stock and a potential value trap. Sometimes, value traps are difficult to definitively identify, but there are certainly red flags that investors can avoid. Here are seven value stocks that may end up to be value traps for investors.
General Motors Co. (ticker: GM)
General Motors is a controversial stock for long-term investors. GM certainly has some high-profile bullish backers, such as Warren Buffett. However, the company is also adjusting to a technological shift in the auto industry and a potential long-term cyclical decline in auto sales. GM’s forward earnings multiple of 6.3 percent is among the lowest in the S&P 500 index, but there are also plenty of red flags. Revenue is down 5.8 percent over the past five years, and earnings per share growth has been negative in three of the past five quarters.
Viacom is also dealing with disruption in its traditional cable TV business. On the surface, Viacom’s 8.2 earnings multiple and solid 2.5 percent dividend make the stock seem like an excellent value, but the company’s business outlook is potentially troubling. Cord cutters have been abandoning cable TV in droves, a trend that is reflected in Viacom’s 5.3 percent drop in revenue over the past five years. Viacom is also expected to generate only about 3 percent earnings growth in 2019, less than half of the projected earnings growth rate of the S&P 500.
Goodyear Tire & Rubber Co. (GT)
Goodyear has an earnings multiple of 6.9, exactly the type of number value investors like. Unfortunately, a glut in the global tire market has been weighing on tire prices and margins, and those pressures have been reflected in Goodyear’s underlying growth numbers. Revenue is down 19.8 percent in the past five years, and EPS growth has been negative in five of the last six quarters. In the longer term, Goodyear may struggle…
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