Value Stocks Or Value Traps?????

The recent market pullback has caused a number of companies to see their share prices fall. These pullbacks are creating a few more values in the marketplace for investors. It is however important for investors to differentiate between value stocks and value traps so they don’t catch a falling knife. Let’s take a look at a few companies that have dropped in recent days and see if they are value stocks or value traps.

Gap Inc (GPS) plunged yesterday as the stock lost 17.4% of it value after releasing its disappointing earnings report yesterday. Rising costs hurt the company’s top line revenue and resulted in declining profitability. Gross margins and same store sales were down while operating costs were up. Inflation is going to force the Gap to either raise prices or continue to deal with shrinking margins.

My Take: Stay away from the Gap. There are better opportunities in the retail sector as the Gap has never been a top performer.

Everybody’s favorite whipping boy, Goldman Sachs (GS) saw its shares dip 4% on Friday. Goldman Sachs is now below $135 a share. The investment firm’s shares have not been this low since July of 2010. Goldman is suffering from the pressure that all financial stocks are under. Investors have abandoned the sector because of regulatory fears that are expected to hurt their earnings power:

My Take: Goldman Sachs is flush with cash and has always found a way to produce even when analysts have doubted. The current price makes Goldman Sachs a bargain.

Freeport McMoran (FCX) is down to $48 a share as the copper market has cooled off from its red hot rise. Shares are now yielding 2.1% and the underlying fundamentals are still strong for Freeport McMoran. This is a stock that relies on a high consumer and investor appetite for copper and gold. A rebound in gold and copper prices means a rebound for Frepport McMoran.

My Take: The stock is cheap both on a P/E and PEG basis. This is a stock that is definitely worth buying as investors can benefit from the 2.1% yield while waiting for copper stockpiles to be replenished.

Photo by: ahisgett

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3 Responses to “Value Stocks Or Value Traps?????”

  1. avatar optionsdude says:

    I like your analysis of FCX. I wish I had a little more money. I would initiate a position in the stock but have my stocks in place already.

  2. avatar Teddi Knight says:

    I agree on the GAP but many stocks are now overpriced.
    Recently I wrote an article on Defensive Stock Investing called Investing To Beat The Smart Money which you can read here
    I believe that the recent pullback still shows too many stocks over valued. Back in mid-March the so called smart money started their move out of commodities and into big defensive stocks like PepsiCo, Kraft, etc and they have pushed up their valuations into over valued territory. I believe this is a typical “game”of smart money investors to entice the retail investors into paying too much for stocks.
    It’s a game smart money plays all the time, because it works. My article looks at a variety of techniques I use to evaluate stocks and pick strike points that offer fair value. After 35 years of investing I know that whether you are an option seller, such as myself or a stock trader, picking the right point to get into and out of a stock is the key to success.
    Teddi Knight

  3. I agree with you. Many stocks are way overpriced (compared to the actual condition of the company). Also, judging by technical analysis, stocks should have a major pullback by the end of this year.

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