Value Trap

A “Value Trap” refers to a Stock that appears to be undervalued based on fundamental analysis but continues to underperform due to underlying issues that are not immediately apparent. Investors may be drawn to the low price-to-earnings ratio or high Dividend Yield, only to find that the company’s financial health is deteriorating.

Examples include:

• General Electric (GE): Once considered a strong investment, GE faced significant operational issues leading to a decline in Stock price despite its low valuation metrics.
• Valeant Pharmaceuticals: Initially attractive for its high earnings and low price, it later became clear that accounting practices were questionable, causing its Stock to plummet.

In both cases, investors thought they were getting a bargain, only to realize the underlying problems rendered the Stocks poor investments.