When Value Might Be a Trap

Many U.S. stocks that seem like bargains because they trade cheap to book value, are actually cheap for good reason.

Aug 28, 2018

When Value Might Be a Trap

Many U.S. stocks that look like bargains because they trade cheap to book value, might be trailing the market for good reason.

Amid the blistering summer heat of early August, U.S. investors saw something shimmering on the horizon for the first time in years: a revival of so-called value stocks. These are stocks that tend to trade at a lower price relative to company fundamentals, such as dividends, earnings and sales. And as the theory goes, they’re a group that tends to outperform in a rising interest rate environment.

Yet Mark Richards, a multi-asset portfolio strategist with J.P. Morgan Asset Management, is cautioning investors to be wary of what he believes is an inordinate number of “value traps” among them.

“The proportion of the cheapest segment of the equity market that also features in the lowest quality bucket is close to the highest on record," Richards writes to investors in a recent J.P. Morgan Asset Management strategy report. So many of these value stocks could be trading cheaply because they are shares in firms that have suffered from the wave of technological disruption in their industries.

 “The risk of picking a cheap stock that turns out to be a value trap has only been greater during the depths of the global financial crisis," he notes. “So many areas of the global economy are being disrupted by new technology...so a low earnings or book value multiple will not necessarily signal that a company's share price represents good value."

Read more about the implications for multi-asset investors.

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