4 Value Trap Stocks to Sell Before It’s Too Late

by Lawrence Meyers | May 19, 2014 2:23 pm

I am primarily a value investor, so whenever I see a stock that looks cheap, I’m the first to leap at it. However, there are always traps in the Wall Street Wilderness, and these stocks have all the makings of companies that appear to be unjustly beaten down. They aren’t.

Twitter (TWTR)

I still don’t understand the hype around Twitter (TWTR[2]). I keep hearing about how the company will “leverage its platform,” yet all I see at the moment is a company that generated little more than a couple hundred million dollars in advertising revenues last quarter.

It had adjusted EBITDA of only $37 million. Operation were about break-even. Yet the company is valued at … $19 billion. How? Nobody has been able to explain to me how Twitter is going to generate much profit at all. How can the market reward this company with that valuation? Value investors may get tempted by the 50% selloff thus far, but I don’t see how this company is even worth $15 per share at this point.

IBM (IBM)

I’m sorry to say it, but IBM (IBM[3]) is not a value stock. The stock trades about 12% from its 52-week high. Yet it isn’t growing at all. FY11 net income was $15.86 billion, FY12 net came in at $16.6 billion, and FY13 came in at $16.48 billion. While analysts project 8% long-term annualized earnings growth, that doesn’t take into account the share buybacks the company engages in.

But hey, it’s not like the company is going bankrupt, and it generates some $15 billion in free cash flow annually. So even if you slap a 9 PE on FY14 earnings of $17.88, you get fair value of $161. But more to the point, IBM is a moribund company and its competitors are racing past it. Sell.

JCPenney (JCP)

JCPenney (JCP[4]) is still a value trap, in my opinion. The company is still struggling to reverse the damage done by previous management. JCP will report earnings on Thursday, and expectations are pathetic — a loss of $1.25 per share on a 3% increase in revenue. Comps were only 2% during the holiday season. The balance sheet remains a mess, and management is frankly just trying to stem the bleeding.

It doesn’t even sound like JCP is looking for a visionary new team to transform the company anymore. The former CEO was brought back as interim CEO last year, but now it seems like he’s not going anywhere. Even at $9, I would stay away. If you insist on it being a value play, at least just purchase a few calls two years out.

Groupon (GRPN)

I know I shouldn’t hate any more on Groupon (GRPN[5]), but the company just makes it too easy. Once again, even at $6, GRPN stock is wildly overvalued. The company simply cannot turn a profit. It generates lots of revenue, to be sure — $758 million in Q1. Even that was a nice 26% increase year over year. But that still led to a loss of 6 cents per share. The big revenue increase occurred in its goods category which has margins of about 17%.

The company made its name on local sales, where margins were close to 90%. Somehow I don’t think that an increase in product revenue from a category with one-fifth of those margins are going to lead to a big earnings spurt. Sell.

As of this writing, Lawrence Meyers[6] did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc.[7], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[8] and blogs about public policy, journalistic integrity, popular culture, and world affairs[9]. Contact him at pdlcapital66@gmail.com[10] and follow his tweets at @ichabodscranium.

Source URL: https://investorplace.com/2014/05/value-trap-stocks-to-sell/

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