It’s common sense for investors to look for stocks that are trading at a discounted value. However, sometimes traditional valuation metrics, such as price-to-earnings ratio, don’t tell the whole story. Certain stocks may appear to be a good value on first glance, but a second look reveals a company and a stock in decline.
Investors refer to these types of stocks as “value traps,” because value investors often get lured into buying them and then get trapped into a losing trade. Here’s a look at five value stocks today that could potentially turn out to be value traps.
1. General Motors
General Motors has a forward P/E of only 5.7, suggesting it could be one of the best values in the entire S&P 500. But GM is facing a new wave of competition from tech-oriented companies like Tesla and Alphabet, and a potentially steep cyclical decline in the U.S. auto market. Over the last five years, GM’s trailing-twelve-month revenue is down 7.2 percent, suggesting a low earnings multiple may be justified.
2. International Paper
Like GM, International Paper’s forward P/E ratio of just 8.5 is low enough to make a value investor salivate. However, you don’t have to be a fan of the TV show “The Office” to know the paper business isn’t what it used to be. International Paper’s revenue is down 16.5 percent in the past five years, and there’s no indication the paper business is due for a major rebound anytime soon.
3. Goodyear Tire & Rubber
At first glance, Goodyear appears to be an excellent value opportunity at a forward P/E of just 6.7. But analysts say there is a glut in the global tire market in the near-term that is pressuring tire prices and margins. In the long-term, tires are one of those products that depend on being replaced. The more innovation extends the life cycle of tires, the less often people need new ones. Goodyear’s revenue is down 19.8 percent in the past five years.
4. Franklin Resources
Like the other stocks on this list, Franklin Resources has an eye-catching 9.5 P/E ratio. Unfortunately, the rise of robo-advisors and the underperformance of active money managers throughout the current bull market has taken a toll on the businesses of money managers like Franklin. Franklin’s stock is down 26 percent in the past year, and its revenue is down 21.8 percent in the past five years.
Perhaps even more than International Paper, Xerox is struggling to pivot from a business that is going extinct. Value investors eyeing the stock’s 7.7 forward P/E ratio should simply ask themselves one question: when was the last time you paid money for a photocopy? The proof is in the pudding, with Xerox’s revenue down 47.9 percent in the past five years.
Disclosure: the author holds no positions in the stocks mentioned.
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