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.
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