Sometimes stocks can look really cheap. They can offer high dividend yields, low price-to-earnings ratios and very attractive underlying assets. But they’re still not a good investment.
That’s because even companies with these characteristics aren’t worth risking your money on if they’re facing insurmountable — or even just very strong — headwinds. All of the positives in the world won’t matter if a business is ultimately going to fall. These investments are known as “value trap” stocks.
Here are 3 value traps to avoid for now:
Value Trap Stock #1: Apple (AAPL)
Apple Inc. (NASDAQ:AAPL) stock rebounded after the company’s earnings results and guidance came in slightly above expectations. Apple also decided to spend $100 billion on share buybacks and raise its dividend 16%.
Despite the rebound, Apple stock is trading at a forward price to earnings ratio of just 13.5. But the sales of the company’s main driver, the iPhone, missed the consensus estimate (52.2 million units sold vs. 52.3 million expected) and only rose about 2.3% year-over-year. That doesn’t seem terrible, but the iPhone X, released in September, was supposed to be a revolutionary product. These aren’t revolutionary numbers. Moreover, the fact that Apple wasn’t able to beat iPhone expectations — which already been lowered in recent weeks — also does not bode too well for its future.
Headwinds I’ve previously identified — increased competition in China and bad publicity surrounding the (potentially intentional) iPhone battery issues — also appear to be taking a toll on Apple.
According to CNBC, sales of the Apple’s “other major devices” were exactly in-line with expectations, while the sales of its iPads and Macs came in slightly below expectations. It appears that revenues generated by the company’s Services — which were slightly above expectations — propelled Apple’s beat.
But in the absence of a “killer” offering, it’s uncertain whether the company’s Services revenue can continue to beat expectations, let alone compensate for continued weakness in its iPhone business.
Value Trap Stocks #2: Disney (DIS)
Walt Disney Co (NYSE:DIS) may look attractive. It’s trading at a price to earnings ratio of just 14 and has some really great assets, from its iconic theme parks, to great movie franchises like Marvel and Star Wars.
But the reality is that in the short term, DIS results will continue to be uninspiring thanks to the proliferation of cord cutting and Netflix.
Cord cutting is hurting ESPN, which is a key part of Disney’s overall business. Meanwhile, cord cutting and the rise of digital advertising are harming Disney’s ABC TV unit. In the quarter ended in December, the operating income of Disney’s Media Networks business — which includes both ESPN and ABC — tumbled 12% year-over-year.
Meanwhile, the tremendous popularity of Netflix has had a negative impact on movie theaters and Disney’s own home movie business — denting Disney’s studios unit in the process. Last quarter, even with the release of a Star Wars’ film, the operating income of Disney’s studio entertainment unit fell 2%. It’s important to note that, taken together, Media Networks and Studio Entertainment account for over 50% of the company’s revenue and segment operating income.
Over the longer term, Disney has correctly decided to take a “if you cant beat them, join them” approach to dealing with the Netflix phenomenon.
Specifically, Disney is launching its own streaming TV service next year, along with a sports TV streaming service. Bit given high content acquisition costs, startup costs, and high initial promotional spending requirements, those initiatives are unlikely to be profitable before 2020.
Value Trap Stocks #3: AMC Theatres (AMC)
The forward price-to-earnings ratio of AMC Entertainment Holdings Inc (NYSE:AMC) stock is 30.9. But its price-to-sales ratio is a tiny 0.42, and its dividend yield is a rather enticing 4.65%.
But the National Association of Theatre Owners estimated that U.S. box office receipts sank 2.8% year-over-year last quarter. Even more alarming, the number of tickets sold fell 6% during the quarter, even though a record setting movie, “Black Panther” was released during the period.
This continues the trend from 2017, when the number of tickets bought also dropped 6%, reaching the lowest level since 1995. There’s little doubt that Netflix is killing the movie star and that the trend is likely to continue and intensify going forward. That bodes badly for AMC, as it owns 8200 movie screens in the U.S. and only 2945 in other countries.
The trend, of course, also does not bode well for AMC stock.
As of this writing, Larry Ramer did not own shares of any of the stocks named.
