Reblog: How to Spot Value Traps
Growth stocks have outperformed value style equities for some time now, but there are rumours brewing value investing to stage a comeback. But to be a successful value investor, you have to be able to differentiate undervalued equities from value traps.
That’s especially true in the current UK environment, with a number of cheap-looking companies having seen further falls. Just this year, we’ve seen big share price drops from Debenhams (DEB), Capita (CPI), WPP (WPP) and ITV (ITV).
Brexit is in part to blame, but so too are the companies themselves. Carillion was a case in point – declining profit margins and excessive leverage did the outsourcer no favours.
Some of these cheap companies will pique the interest of value investors. In fact, Steve Magill, head of UBS’s European Value team, says his “natural hunting ground” is in areas where we’re seeing profit warnings. Though, he adds: “We’re trying to finesse our timing because we do know that where you have one profit warning, you’ll have many profit warnings. But that’s a time of opportunity.”