What does it mean when investors talk about the “value trap”?
Broadly speaking, not all cheap stocks are a good value. If, like many value investors, you buy a stock that has a better-than-average dividend and is less expensive than other similar securities, then it could be a good deal. But there is also a chance that it isn’t.
Put another way: Some things are cheap for a reason.
Sometimes a stock’s price falls because sophisticated investors see a longer-term problem with the company and decide to dump their positions, explains Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ. It could be, for example, that those savvy investors believe the company is in bad shape and will cut its dividend in due course.
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