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Value Trap

What is a 'Value Trap'

A value trap is a stock that appears to be cheap because the stock has been trading at low multiples of earnings, cash flow or book value for an extended time period. Stock traps attract investors who are looking for a bargain because these stocks are inexpensive. The trap springs when investors buy into the company at low prices and the stock never improves. Trading that occurs at low multiples of earnings, cash flow or book value for long periods of time might indicate that the company or the entire sector is in trouble, and that stock prices may not move higher.

Explaining 'Value Trap'

Companies, and even sectors, can be doomed, because of situations such as the inability to survive competition, the inability to generate substantial and consistent profits, the lack of new products or earnings growth, or ineffective management. Often, a value trap appears to be such a good deal that investors become confused when the stock fails to perform. As with any investment decision, thorough research and evaluation is recommended before investing in any company that appears cheap when reviewing its relevant performance metrics.


Further Reading


Fundamentals of value versus growth investing and an explanation for the value trap
www.tandfonline.com [PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …

IPR Protection and" Catching-up Trap"——Based on the Perspectives of Global Value Chain <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-GGYY201106007.htm' />IPR Protection and" Catching-up Trap"——Based on the Perspectives of Global Value Chain [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-GGYY201106007.htm'>PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …

Global value chains, contract manufacturers, and the middle-income trap: The electronics industry in MalaysiaGlobal value chains, contract manufacturers, and the middle-income trap: The electronics industry in Malaysia
www.tandfonline.com [PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …

Reintegration: A Type of Modularization Trap——Based on Evolutionary Perspective <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-GGYY201202011.htm' />Reintegration: A Type of Modularization Trap——Based on Evolutionary Perspective [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-GGYY201202011.htm'>PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …

Financial development by learningFinancial development by learning
www.sciencedirect.com [PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …

The Origins, Typology of China's Modularization Trap and the Growth of Productivity <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-XSYK200802016.htm' />The Origins, Typology of China's Modularization Trap and the Growth of Productivity [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-XSYK200802016.htm'>PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …

Shareholder-value-based brand strategiesShareholder-value-based brand strategies
link.springer.com [PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …

Third Wave of Industrialization: To Survive" Middle-income Trap" with a National Value ChainThird Wave of Industrialization: To Survive" Middle-income Trap" with a National Value Chain
en.cnki.com.cn [PDF]
… “Value” and “growth” are prominent labels in the lexicon of finance … sample covers all companies in the Compustat database at any time during that period, except financial companies (SIC … 3. Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap …



Q&A About Value Trap


What is a value trap?

A value trap is a stock that appears to be cheap because the stock has been trading at low multiples of earnings, cash flow or book value for an extended time period.

How do you avoid investing in stocks that might turn out to be traps?

You should thoroughly research and evaluate any company before investing in it.

Why do investors buy into companies when they appear to be cheap?

Investors buy into companies when they appear to be cheap because they are looking for a bargain.

What can happen when you invest in stocks with poor performance metrics?

The stock never improves and the investor loses money.