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These stocks look cheap: but do not buy them

We highlight stocks that look enticingly cheap, but are likely to prove value traps for investors.

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by Danielle Levy on Oct 01, 2010 at 11:08

We highlight stocks that look enticingly cheap, but are likely to prove value traps for investors.

A swathe of stocks may appear to be cheap at current valuations, but investors are warning that now more than ever is the time to be vigilant for value traps.

UK equity specialists argue that these stocks may have seen their share prices depreciate significantly and could be mistaken as value or recovery stocks, but their potential to grow earnings could well be overestimated.

Debt problems

Peter Thomson, CIO of Taylor Young Investment Management and manager of the CF Taylor Young Growth fund, is particularly sceptical of stocks which may encounter problems servicing their debt and would therefore need to raise capital to shore up their balance sheets.

‘The issue there is what level they need to raise capital to shore up their balance sheets. This is a value trap as it looks cheap but it may need to further discount to attract fresh capital to the business. If they can’t you could get stuck,’ Thomson explained.

FTSE 250 stock Speedy Hire, which provides tools and equipment hire, falls into this category, Thomson asserts.

‘They are in a real value trap. They are struggling to increase capital to get fresh contracts, having over-expanded,’ he said.

Thomson also views utility stock National Grid as having the potential to fall into the value trap category, pointing to its ‘huge weight of debt’ and the fact that investors could be lulled into a false sense of security because the company is regulated. In addition, he believes the company’s required infrastructure spend could be larger than anticipated.

‘It is in the utility space so people hold it as more of an income stream, but it could turn into a value trap,’ Thomson said.

He also highlights Sheffield Insulation, which distributes insulation and related products to the construction industry as another potential black hole.

Hazy future

Mark Slater, manager of the MFM Slater Growth and MFM Slater Recovery funds, believes the key is to avoid companies where the outlook is ‘not sufficiently clear’.

‘Where one has doubts, one has to avoid. This is why we are not invested in retailers. They are cheap on the face of it, but it is not clear how they are going to be affected over the next few years as consumers come under more pressure. Their costs are going up and VAT is going up,’ Slater said.

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19 comments so far. Why not have your say?

I was asking for names of goldshares that one could invest on at the present market climate.

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Gold shares?

I currently hold AGLD, GMA and SHG.

All doing very nicely. Some analysts suggest gold could hit $1450 in a matter of months and all of the above have initiated programs to increase current production levels, which will positively impact their bottom lines and respective share prices.

Good Luck All.

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He is wrong regarding National Grid

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Fredr, I think that you are right. We got one fund manager (NW) saying it is as safe as houses and another saying avoid. I dont think they could agree on the colour of poo. One thing is for sure, I know that gold has still a long way to go as yet.

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If the herd are heavily into gold, then its too late !!

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I think Natiional Grid should be regarded as income stock and investors should not expect dramatic capital growth. The stock should move with the market but slowly ie.it will underperform the market, upwards as well as downwards.

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National Grid recently held a rights issue so another is highly unlikely. A good solid stock with a great dividend. I'd rather invest directly in them than trust the guesswork of so-called "fund managers."

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Why should I buy a stock like National Grid knowing it will underperform, when there are so many stocks out there which are outperforming?

The logic of these dividend enthusiasts escapes me . . . . . .

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@Roger May.

People invest for numerous reasons and look for different outcomes. For example, some people will like to achieve capital growth, some people will like to have income (e.g. due to retirement). Some people are just gamblers who like to find stocks that shoot up for a quick buck and the pleasure...

Each of these investors have their reasons for the stocks they buy. I hope this explains to you why "dividend enthusiasts" might like to buy dividend stocks, rather than search for stocks that "outperform" (by magnifying market moves).

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Confused- Goldshares

Try Black Rock Gold and General

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still happy with national grid

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National Grid has had a good capital return in recent months in addition to the divi and the rights issue proved a great buy as it is almost back to the pre-issue price.

On Gold Blackrock G&G has done very well for me but Ruffer Baker Steel Gold has done even better - only problem here is you can only deal weekly [10.00 Wed] and this can make a quick sale difficult if there is a sudden and extended fall

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confused, I bought Cluff gold @ 77p the price today is 108p recommended two days ago a buy at 97p by the telegraph. I bought charrat @ 24p price now45p.

I also bought Centamin Egypt@ 118 price now 173p.

I think thay are worth looking at. GOOD LUCK.

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seems to me there are no certainties anymore either for capital value or dividends.

just the ancient two "death and taxes"

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A Gold mining share that is doing well, and in my opinion will carry on doing so is St. Barbara Ltd. traded on the Australian market, now 40cents but should have reach 60c in the next 6-12 months. I have a small investment in them.

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Utterly confused but sticking to Black Rock Gold

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I had no idea Ruffer Baker Steel Gold would only let you trade once a week!!!

All my prejudices on unit trusts are confirmed.

I can trade any investment trust at any time the market is open.

Try City Natural Resources High Yield investment trust - doing well at the moment.

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National grid doing ok at present thank you.

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cap'n kirk

Apr 19, 2011 at 00:10

Looking for some luck this time around (had little so far), thought about SF T1ps growth and gold funds for investment this year. Help or comments appreciated.

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