Saturday, January 10, 2015

BASICS FOR BEGINNERS ....


Courtesy : Investopedia, Stockopedia

VALUE TRAP 

DEFINITION of 'Value Trap'
  

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. 

                                                                        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.

How to avoid Value Traps...

Of course, it's easy to say with hindsight that a failed investment was a value-trap but are there any ways to flag this in advance? Fundamentally, the key to avoiding value traps is doing your homework and exercising  caution when approaching enticing investment prospects. It's crucial to be as precise as possible about intrinsic value through fundamental bottom-up company analysis. The other issue is that it's important to have an adequate margin of safety since this is the value investor's buffer against errors in the intrinsic value calculation. However, beyond that, there are some common fact-patterns that it's worth watching out for....


Few  Signs that Your Stock May be a Value Trap



1. Is the sector in long-term secular decline?


A company may simply be serving a market that no longer exists in the way it used to. No matter how good the company, it will need a fair wind behind it eventually and and if the sector itself is dying, it's likely to be a huge battle to realize value. From a demand perspective, it's important to distinguish between cyclical and secular declines. In the former case, short-term demand will rebound with an improved economy. In the latter case, demand is in long-term decline (e.g. due to societal and demographic changes), which means that the remaining players are left to fight for a share of an ever-decreasing pie.


2. Is the risk of technological obsolescence high?


Technological progress can radically reshape an industry and its product lines - this can have a major impact on the life cycle and profitability of a firm .One might assume that a stock is cheap enough to compensate for decreasing cash flow but, sometimes, cash flows hits a tipping point and drops off faster than you expect. 


3. Is the company’s business model fundamentally flawed?


Sometimes, a company may simply be serving a market that no longer exists, or at a price-point that is no longer relevant, given competition and/or new substitutes for the product. 


 4. Is there excessive debt on the books? 


More often than not, financial leverage magnifies the pain of a value trap. Limited or no financial leverage gives firms access to the the most precious commodity of all - time! A company with no debt is unlikely to go under, barring a major catastrophe (e.g. a massive legal settlement against it). On the other hand, excessive leverage can destroy even a great company. For a good margin of safety, the debt to equity ratio should be as low as possible  and interest cover should be comfortable

5. Is the accounting flawed or overly aggressive ?



It's best to stay away from companies where aggressive or dubious accounting is employed. You should be “triply careful” whenever management uses some metric that they define, rather than conventional metrics .


6. Are there excessive earnings-estimate revisions? 

Analysts are quite lenient and usually revise their estimates downward before earning releases to allow companies to beat their estimates. Occasional missed earning estimates can provide an opportunity to buy on the dip, but a pattern of missing earning estimates may mean that management are struggling to forecast properly, with a knock-on effect for the analysts, and/or that management doesn’t understand or are not willing to fix problems.


7. Is competition escalating?



Be careful of companies facing increasingly stiff competition. Is there a tendency for the industry to compete on price to squeeze margins? If there are limited barriers to entry and a company is unable to differentiate itself, then it's possible that the market structure has simply moved against it - it may never recover the glory years of the past. One way to test this is to compare the historic profit margin trend over the last 10 years. If the profit margins are decreasing, this may suggests the company is unable to pass increasing costs onto its customers due to increased price competition




8. Is the product a consumer fad?


Another sign of a possible value trap is a product that is subject to consumer fashion or whims. Evolving consumer tastes and demand may mean that the market for the product is just a short-term phenomenon





9.   Are there any worrying corporate governance noises?



It's worth checking for any history or noise that suggests minority shareholders might be getting a raw deal .

145 comments :

  1. Thank you sir... Learned a new thing today morning itself...

    ReplyDelete
  2. Dear VP sir,
    Happy new year, you have a amazing foresight to predict the companies future, I have been following you for last around 1 year, I was a more of a trader, where I missed all good companies trading in and out, as of now missed a good opportunit to create wealth, now I have planned to turn to a long term investor,I have picked some companies for long term can you please give your views on long term, 1. Skm egg. 2.atul auto, 3. Gruh fiance, 4. Repco home finance, can I be able to create a good amount of wealth from these. Thanks shailesh

    ReplyDelete
    Replies
    1. Detailed views already expressed about SKM and Atul auto .

      Gruh - Not tracking

      Repco Home - Already Expressed positive view as comment around Rs.300

      Delete
  3. Dear VP,
    Thanks for sharing such a wonderful useful information with us.

    ReplyDelete
  4. Very good topic sir, many of investors were trapped in this value trap. Every investor should read this, before jumping into a stock.

    ReplyDelete
  5. Dear sir thanku for ur guidance. Gvk power nd infra is a value trap. Ur view Pls ?

    ReplyDelete
  6. Respected Sir,

    Wish you a happy and prosperous new year.Hope you continue to helo small investors like us as we have leard a lot from you and will continue dng so.
    Sir, I have added SKM at belwo 100 price....But i have done research on this company and gone through yor viws o skm...I feel its a awesome company to own for long term..

    Sir Could you plz plz let me know if I can add more at CMP.
    Your reply will also help people who have not yet invested but are are willing to invest in this gem...
    Plz plz reply sir...

    Thanks in Advance Sir
    Rahul

    ReplyDelete
    Replies
    1. Not sure why you are not in a position to take a decision after studying the company in details . Whether any stock is suitable or not is a decision only the investor can take based on his own risk taking capacity which is known only to him /her. Whatever I can do is - share whatever I know about the company .

      Take a call after own due -diligence

      Delete
  7. VP Sir,

    I am owning Gujarat Borosil from 22 levels......Sir do you think that the recent developments in the solar sector will help Monopoly players like borosil...Also sir is there a chnage of competition from chinese player and will it impact borosil in a big way or small way......
    Plz do reply sir....as i want to invest more in GBorosil.


    Thanks in advance

    ReplyDelete
    Replies
    1. Pls check the current status of gas supply related issue

      Delete
    2. Dear VP Sir,

      Could you explain the relationship between Gujarat Borosil performance and Gas Supply

      Delete
    3. http://archive.financialexpress.com/news/industrial-units-in-south-gujarat-stare-at-58-pct-cut-in-natural-gas-supplies/1287968

      Delete
  8. Thank you sir for these very useful informative articles.

    ReplyDelete
  9. Thank you for the educative post.
    Regards
    Roshni

    ReplyDelete
  10. Thank you sir for valuable guidelines

    ReplyDelete
  11. Sir thank you very much for the wonderful column, we are really indebted to your free service. Sir , SEBI changes the circuit levels for scripts from 20% to 10% or from 10% to 5 % or 5% to 2% .how will we know that the circuit is going to change in advance. Do they publish anywhere?? Kindly answer when you are free.Thank you.

    ReplyDelete
    Replies
    1. It is not SEBI fixing this , but the exchanges.

      Frankly speaking I don't know the benchmark they are considering to change circuit filters.Sometime they will reduce a 20 % circuit to 10 % once the stock hit two consecutive 20 % filter , but in some other cases 5 % circuits increased to 10 or 20

      ;)

      Delete
  12. Can one park his money in tata Elxsi and forget .. Say 1% of his networth ..
    Its altogether in a different league ..no competition n brand name ..
    Look at marico kaya- a different business n competition n brand name .. Up 5 times

    ReplyDelete
    Replies
    1. In my opinion . there is no stock to buy and forget . Each company's business should be monitored periodically and take decisions accordingly

      Delete
  13. Sir ur view on Canfin homes at cmp ..also co is proposng a right...
    also give overall view on hosing fin co.

    ReplyDelete
    Replies
    1. Canfin is a stock suggested around Rs.145

      About Rights issue

      Nothing to comment about that before company deciding size of the rights issue, ratio, price ..etc

      Delete
  14. Dear Vp.
    Thanks for this great article...

    Regards.

    ReplyDelete
  15. Www.screener.in is a good site to check compny details compared to moneycontrol.

    Am not sure vp sir post this :)

    ReplyDelete
  16. Sir thanks for sharing valuable information
    ..please suggest on HCC, punjlloyd, birla precision

    ReplyDelete
  17. Sirji plz give us your view on venkys

    ReplyDelete
  18. Dear sir please advise ..monte Carlo good to invest ??

    ReplyDelete
  19. Not tracking any of the above mentioned stocks

    ReplyDelete
  20. Dear VP,
    VALUE TRAP - nice lesson for investors to start 2015. Thanks for publishing this.
    Kind regards,
    Chandrashekara

    ReplyDelete
  21. Hi,

    Good evening,

    Could you please let me know your views on IL AND FS engineering.

    Thanks

    ReplyDelete
  22. thank you VP Sir. This is enhancing our learning by a great deal.

    ReplyDelete
  23. sir please reply your view on eco recycling one can buy at this level
    thank you

    ReplyDelete
    Replies
    1. Earlier suggested @ Rs.25 , nothing to add at this point.

      Delete
  24. Is it advisable to buy Nesco & Mayur uniqoter at current level for long term ?

    ReplyDelete
    Replies
    1. Mayur is a good company for long term investors

      Not tracking Nesco

      Delete
  25. sir you view on jb chemicals. thanks

    ReplyDelete
  26. Sir
    whats your view about Bal Pharma?
    Rgds

    ReplyDelete
  27. Sir, can I please know your view on Plastiblends. The CMP is 255 with a 52 week H/L of 312/93. The company has consistently reported increase in sales from 2005 onwards with OPM of 10%+, has been a consistent dividend payer. The book value is 116, zero secured debt and 31 crores of unsecured debt. The company has reserves of 130 crores and equity of 6.5 crores

    ReplyDelete
  28. Pls share our view on Sharon bio medi ltd
    For long term

    ReplyDelete
  29. Sir, your views on IG Petro please.It is an established market leader in Phthalic Anhydride (PAN) with strong recognition, excellent plant facilities and international standards of Phthalic Anhydride (PAN). Equipped with the third largest capacity in the world at a single location, the Company has the ability to meet competition not only in the local market but also in the international market. Phthalic Anhydride (PAN) is used in industries such as flexible PVC, plastics, paints, construction, transportation and marine

    ReplyDelete
    Replies
    1. Not tracking above mentioned stocks . While investing in commodity type business one should learn the international price trend and cycle of the product.

      Delete
  30. dear sir
    pls share ur view on Capital first , it is not moving with other finance companys like repco , bajaj, indiabulls etc and trading at low price to book. pls suggest i hold a good quantity. IS it a value trap

    ReplyDelete
    Replies
    1. I can only say about company fundamentals .Price movement is purely supply demand driven which is beyond my control

      Delete
  31. Sir ur view on Axis cades at cmp ..its looking good having great mgmt…..also in defence.
    any negatives from ur side ..i knew it ran up substantially but may be a further rewarding

    ReplyDelete
  32. Business prospects of company is not bad .In case of an entry at current price, take a call based om own risk profile.

    ReplyDelete
  33. Sir, may I know your views on a) Madhav Marbles & Granites Ltd and b) DCM Shriram ltd?

    ReplyDelete
  34. VP Sir I would love your views on Sutlej Textiles. It is a Rajasthan based company belonging to the KK Birla group. It is the largest producer and exporter of value added synthetic and blended dyed spun yarn in the country. It endured the 2008 crisis with only its debt increasing, but the debt levels are coming down. Can Textile sector be considered as long term bet? Will you consider Sutlej a valuepick?

    ReplyDelete
  35. Sir your views on Indo count industries?

    ReplyDelete
  36. Dear Sir, i'm holding IFB industries, Please let me know further prospectus

    ReplyDelete
  37. I was thinking of taking a personal loan of 5lacs at 14% and invest in SKM Eggs for a long term. I will be able to pay the EMI from my salary.

    Do you think it is a good strategy?

    I know you don't like to give personal advice, however I appreciate your knowledge and wisdom and hence would like to get your feedback.

    Thanks.

    ReplyDelete
    Replies
    1. I never advice any retail investor to buy shares of any company using loaned funds . Invest whatever you left after savings.

      Delete
    2. Why do you want to avail loan for that! !!!!!! Instead invest the same emi amount in sip.the benefits will be the same without any risk. This is my personal opinion. .....

      Delete
    3. Very well said VP sir ! I too agree with you.

      Very valuable advice. Hats off !!

      Delete
  38. Sir what is view on associated ALCHOLOL and Brewers ltd seems interesting on hist data basis

    ReplyDelete
  39. Sir please your view on maxwell ind . Mirza and carborundum universal .sintex. please reply abkibar

    ReplyDelete
    Replies
    1. Carborundum is not a bad company , but one need to show patience till some revival in its user industries

      Sintex is a low risk one at this point

      Not tracking other two

      Delete
  40. Sir, wat are ur views about arrow coated promoters selling shares in open market?? is it negative for the share

    ReplyDelete
    Replies
    1. Depends on the genuine reason of selling

      Delete
    2. Sir, Has Arrow given any official reason for the same.......rgds

      Delete
    3. Reason they explained in BSE site . But investors will be always suspicious and nervous in these type cases and we can't blame them . This suspicion may last long at least till the result .

      Delete
  41. Dear Sir,
    I wanted your view on Tata power and Intellect design arena. I am a long term investor and would like to know if it's good to enter in these stocks at current levels?

    ReplyDelete
  42. Hi VP sir,

    Please share your views on Alok Industries ltd.

    ReplyDelete
    Replies
    1. If you are looking into textile space , I think , there is many better alternatives.

      Delete
  43. Sir, wish you a happy pongal.. Framers are pride to our nation.. You being a farmer and doing a selfless work makes ahead from others.. Live long with all wealth and health.. Let's continue to learn from you sir!

    ReplyDelete
  44. VP Sir, Wish you and your family a Happy Pongal.. I also wish all other readers of this blog a Happy Pongal...

    Thanks

    ReplyDelete
  45. Dear VP Sir,

    Need ur suggestion on Provogue and Prozone, also wats the future of Sugar stocks.

    thanks,
    Ram

    ReplyDelete
    Replies
    1. Not tracking Provouge or Prozone

      Sugar stocks not seems as compelling buy at this point

      Delete
  46. Hello Sir,

    Your views on hindustan tin please. . .

    ReplyDelete
  47. Can you please explain why Hindustan Tin Works is not one such value trap? Packaging industry is moving to plastic more and more (with food grade plastic). I am looking for your expert analysis on this.
    The stock is refusing to move above Rs 80 now.

    ReplyDelete
    Replies
    1. My opinion about changing trend to plastic already explained in posting about Hind Tin

      Delete
    2. Sir, Neverdays i have been seeing in some bakerys trend is changing Plum cakes in small round Tin boxes, some famous Sweet shops selling some of its good swwets in Tin boxes. In Chennai there is a famous swwet shop Krishna Sweets, they are selling one of its sweet Cashew Bites in Tin boxes, which makes it attractive too. Got a sense of this from the various markeets, just wanted to share with you. Thanks a lot for guiding us always

      Thanks
      Sathiya

      Delete
  48. Sir any view on Godavari Drugs .. Bought some at 43 and after that it was going non stop with 2% limit ..got only few shares to buy ..
    Then I added some more at 58 when the circuit was open ..

    Can I term this scrip as a loss in my account and forget it ?? The capital allotted to this scrip is 3% of my holdings ..

    Some view on Andhra Sugars too ??
    Have not bought it as a sugar play ..

    ReplyDelete
    Replies
    1. Let us hope the business momentum will continue in Godavari :)

      Not tracking Andhra Sugar

      Delete
  49. Hello sir,first day here , someone told me that U r mahatma of stock market, I am curious to know ur most recent recommendations , and more importantly where did you get so much knowledge from. What makes you so intelligent in stock market? Yea, Super likes for the way you help others!

    ReplyDelete
    Replies
    1. Please don't give such credentials to me .

      I am only one among you

      Delete
  50. Sir,
    Is it a right time to buy Berger Paints or wait for some correction...

    waiting ur valuable reply...

    ReplyDelete
  51. Dear vp sir , please advise us for the prospect of himadri chemical only company manufacturing tar and recent govt announcement for road projects

    ReplyDelete
    Replies
    1. This is not the only listed company manufacturing tar.

      Delete
  52. VP Sir, your view on the AUTOMOBILE CORPORATION OF GOA Ltd and their results.

    ReplyDelete
    Replies
    1. Result was below expectation but auto sector may improve in future.

      Delete
  53. Hi VP sir,

    Do you think Selan exploration is a contrarian buy on another 10% dip?

    Thanks

    ReplyDelete
    Replies
    1. But in small lots if you have enough patience

      Delete
  54. Sir your views on Professor Sanjay Bakshi's new find Poddar Developers ..
    Do you also follow his studies and I guess he hasn't got a single study wrong ..

    ReplyDelete
  55. Dear Sir,
    What is your view on Dolphin Offshore and Premier explosives.
    Is it good to enter these stocks at current levels?
    I am a long term investor.

    ReplyDelete
    Replies
    1. Already suggested at much lower rate

      Delete
  56. A BIG Salute to you VIP,
    I invested my fortune in JSPL, two years ago. After seeing little bit of up movement, the stock has fallen sharply from my purchase price and as on date am incurring a huge loss on it. Please advice whether to stay invested or shift the proceedings to other companies ??
    Your advice on this is the only ray of guidance.

    ReplyDelete
  57. Sir,
    Could you please guide me on intellect design arena, network18 media, spicejet and raj rayon, on long term basis ?
    Please reply.

    Thanks in advance.

    ReplyDelete
    Replies
    1. As of now ,not tracking any of these cos

      Delete
  58. Hi, ur view on Rajoo Engineers?

    ReplyDelete
  59. Hello sir,
    Happy pongal to you and your family. May god bless you and fulfill all your wishes.

    Need your views on Can Fin Homes rights issue. Should we subscribe to it.

    ReplyDelete
    Replies
    1. Nothing wrong in subscribing the rights issue.

      Delete
  60. m sorry sir i didnt read the recent comments before asking abt rajoo engineering.... Sorry!!!

    ReplyDelete
  61. Sir, First of all thanks a lot for identifying Multibase India at such an early stage. Got the chance to enter into it at 70 odd level's and today sitting on huge profits.... Indebted to You Sir..... Sir again the silly Question for you.... Time to Book some Profit or Hold on to it? Although i am a long term investor just want your guidannce.....

    ReplyDelete
    Replies
    1. Company is not a bad one but recent sharp appreciation is due to govt's plans to make compulsory air bag option for passenger cards. If this decision get final nod , it may change the fortune of company but if there is any change for this plan , stock may correct.

      Delete
  62. Dear Sir,
    You had suggested to book profit in dolphin offshore at around 210 levels.
    But the stock has gone through huge correction so is it good to re-enter the stock at current 150 levels?

    ReplyDelete
    Replies
    1. I think,oil exploration related stocks may bit soft in medium term

      Delete
  63. Hi Sir,
    Please share your views on DLF.

    ReplyDelete
  64. VP sir,
    your views on Philips Carbon ,regards.

    ReplyDelete
  65. Sir, pls provide your views on Ahmednagar Forgings? Why its available at dirt cheap valuations?
    Thanks Sir,
    Gaurav

    ReplyDelete
    Replies
    1. Not tracking above mentioned few stocks

      Delete
  66. Dear VP,
    I just saw in news channel a recommendation as MM Forging which you had already picked in your post in June 2014 and i was compelled to make this post as i wanted to appreciate your keen eyes which pick these kind of gems earlier than the commercial predictors....and i also wanted to ask you whether you think this stock could be bought at these levels ?

    Thanks,
    Ramesh

    ReplyDelete
    Replies
    1. Stock already appreciated almost 200 % from suggested level in less than 9 months . Not suggesting fresh entry at this level for average risk takers.

      Delete
  67. Sir, please share your views on sudarshan chemicals?

    ReplyDelete
  68. Sir,

    Your views on Jay Bharat Maruti.. It tanked after below average results.. Do you think it will revive or its time to exit.

    Thanks

    ReplyDelete
    Replies
    1. I believe , Yesterday's reaction was more than enough .
      Generally positive on Auto Ancillary sector.

      Delete
    2. i want to purchase with cash of RS 50000/- at this time what u are suggesting in this eighther aimco or skm egg please suggest i will wait for one year

      Delete
  69. Ur view on Assam Company after ONGC deal?

    ReplyDelete
    Replies
    1. Company is telling such stories for past many years .But nothing beneficial to its share holders happening in business.

      Delete
  70. Dear VP,
    Please share your view on freshtrop fruites and Indosolar.

    Regards,

    ReplyDelete
  71. Sir,
    CAPITAL FIRST has doubled from your recommendation level...Your valuable suggestions on that sir...

    ReplyDelete
  72. Dear VP, WHats your impression on Bharat Seats 1.at CMP 2.irrespective of CMP?

    ReplyDelete
  73. Sir do you give info regarding shares on facebook as many people on money control board are stating that zf engg has been recommended by you on fb page, is this true

    ReplyDelete
    Replies
    1. Suggested to keep ZF in radar in expectation of better future

      Delete
  74. Hello VP Sir,
    What is your views on Kaveri seeds considering I haven't invested in this company yet. I have gone through your old posts but havent found anything after recent correction do you see any negatives or still good company to enter.

    Thanks

    ReplyDelete
    Replies
    1. Recommended buy before stock split @ Rs.250 . Current price is Rs.3790 ( Adjusted to 5:1) stock split . Neutral at CMP

      Delete
  75. sir please share your view on south indian bank

    ReplyDelete
  76. Hi Sir, pls give your valuable inputs for Shree Hari chem.

    ReplyDelete
  77. Sir,

    Your views on M/s Take Solutions.. As as per technical.... share had made rounding bottom pattern .... can be multibagger in long term from here ... V P Sir pls guide urgently.

    ra2g .


    Thanks

    ReplyDelete
  78. Sir, desperately needing your sound advice on Marksans Pharma and Reliance Power. Are these stocks looking attractive to you on a technical basis? Please give an opinion. Thanks

    ReplyDelete
    Replies
    1. Marksans pharma adviced to Buy @ Rs.4 and take part profit @ Rs.64

      Not tracking Rel Power

      Delete
  79. Sir
    What is ur view on next media works considering recent developments in Fm radio field....ur openion deserves highest respect and it is highly appreciated...thank u ..

    ReplyDelete
    Replies
    1. The much awaited auction is going to happen. But company's financial position is not so great , hence how company can raise funds to participate in this round of auction is a question .

      Delete
  80. Sir please your view upon amtek auto one Auto Ancillary stock thanks

    ReplyDelete
  81. hello sir,

    Whats ur view on ricoh india ???
    can u plz suggest whether i can buy at current levels

    ReplyDelete
  82. Dear Sir, what's your view on "Arvind Remedies" for long term perspective view? It have potential to become multibagger in next 2-3 years or not? please explain my doubts in details. thanks sir.

    ReplyDelete
    Replies
    1. Many times in the past replied as Not tracking it

      Delete
  83. Hello, looks like MIC Electronics is having some legal trouble with their Nasik contract? Any change in your views? I know you suggested it for high risk takers, but is it ok for them also to continue to hold for long term?

    ReplyDelete
  84. Hi sir hats off to you for your guidance

    ReplyDelete

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