Value Stock Or Value Trap?

Welcome to Episode #42 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

This week, as promised, she tackles the difference between value stocks and value traps.

How can you tell one from the other?

Tracey says the key isn’t just in finding the cheapest stocks. It’s really all about earnings.

A true value stock will be cheap and will still have rising earnings. Just because you’re a value investor, that doesn’t mean you shouldn’t demand earnings growth as well.

The value traps usually have declining earnings estimates, or even year-over-year earnings declines.

The difference between the two is best shown through examples.

Value Trap or Value Stock?

1. Avis Budget Group (NASDAQ:CAR) has a forward P/E of just 8. But the rental car market has been struggling. Tracey looks into the earnings estimates to see if there is a buying opportunity there or not.

2. General Motors (NYSE:GM) is super cheap with a forward P/E of 5.4. Tracey knows that many people love it. Big fund managers were even adding to their positions in the first quarter. But how does its earnings growth look?

3. Gilead Sciences (NASDAQ:GILD) was the darling of many investors a few years ago. But shares have since slumped and it now trades with a forward P/E of 8.4. Is it a value or a trap?

4. LGI Homes (NASDAQ:LGIH) is in the hot home construction business. Shares look cheap, with a forward P/E of 8.5. Do investors also get earnings growth?

5. Micron (NASDAQ:MU) has been one of the hottest stocks of the last year. How is it possible it could also be a value? Yes, it’s still cheap. It has a forward P/E of just 7.9. But what about its earnings?

There are also some industries that have seen sharp sell offs in their shares, but that doesn’t mean they’re a value.

Tracey looked into the fertilizer stocks including Potash. Are they value stocks or value traps right now? She also checked in on the railcar makers like Trinity Industries, which have been value traps over the past year.

Beware of the cyclicals. It’s easy to get fooled.

What else should you know about finding real value stocks and avoiding value traps?

Tune into this week’s podcast to find out more.

Want more value investing insights from Tracey?

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It holds between 20 and 25 value stocks for the long haul.

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