A value trap is a company that appears cheap because its stock price has recently fallen, but which is still expensive relative to intrinsic value.
A value trap masquerades as a value stock because its stock price has been beaten down. However, unlike a true value stock, a value trap's price is low for a good reason.
Investors who buy solely on stock price are likely to be caught by value traps, because it takes investigation into the fundamentals of a company and its management to determine whether a stock is a value or a value trap.
Because investors buy value stocks on the assumption that they will return to their intrinsic values, investors who mistakenly buy value traps risk losing the price appreciation they were anticipating.
Related Fool Articles
Recent Mentions on Fool.com
- How to Invest Money in Banks
- Thinking of Gifting an Inheritance to Your Grandchildren? Keep These 3 Things in Mind
- The Simple Financial Trick That Can Save You Thousands
- 3 Investments That Could Lose You Lots of Money
- Is Now Finally the Time to Buy Offshore Drillers?
- This 10% Dividend Yield Appears to Be a Trap