One of the most difficult — and most important — aspects of value investors is determining whether a “cheap” stock is a value play … or a value trap. Stocks with low earnings multiples or trading below book value could be opportunities the market is missing. Or those multiples could be warnings from the market that these companies should be avoided (or in some cases, are stocks to sell like they’re radioactive).
Like everything else in investing, it’s not an exact science. But value traps generally offer declining sales and/or earnings, while also facing company- or industry-specific headwinds likely to accelerate those declines.
U.S. brick-and-mortar retail has been a prime of example of late. Low multiples there in most cases weren’t a buying opportunity. Rather, they were the result of a realization by investors that e-commerce competition led by Amazon.com, Inc. (NASDAQ:AMZN), along with other factors, was likely to send earnings — and share prices — sharply lower.
Retail still has a few value traps, and so do many other sectors. Here are 10 of those value traps, which at best should simply be avoided, but at worst are stocks to sell in a heartbeat.