Know the Traits of a Losing Stock
https://money.usnews.com/investing/stock-market-news/slideshows/8-traits-of-a-losing-stockValue investors are perpetually on the hunt for stocks that are underpriced based on the underlying company’s performance. However, sometimes traditional value investing metrics such as a price-earnings ratio don’t paint the full picture of what’s going on with a company.
Former Kase Capital hedge fund manager Whitney Tilson recently outlined a number of traits that are hallmarks of “value trap” stocks. Tilson says not all value stocks are created equal, and failing to recognize all the subtle warning signs can devastate an investing portfolio.
Here are eight traits that help identify losing stocks.
1. It has an unsustainable business practice. Turnaround stories can be excellent investment opportunities. For example, by the end of 1998, Apple (ticker: AAPL) shares had declined nearly 80% from its 1992 high. Of course, the launch of the iPod and iPhone completely changed Apple’s trajectory and paid off huge for patient investors.
Tilson says investors should determine whether or not a company’s business is ultimately doomed. Stocks like Eastman Kodak Co. (KODK) can remain profitable and seemingly undervalued for years as the underlying business slowly dies. All the value metrics and brand strength in the world couldn’t save Kodak from the disruption of the smartphone.
2. There is legal or regulatory scrutiny. Tilson’s most noteworthy short call of his investing career has been Lumber Liquidators Holdings (LL). Lumber Liquidators shares famously crashed from its all-time high of $115 in 2013 to $12 by August 2015 after Tilson was featured on a “60 Minutes” episode detailing illegal practices by the company. Companies exposed to legal or regulatory risks can be extremely difficult to accurately value given the uncertainty. – Wayne Duggan
