Merrill Lynch: Avoid 'Value Traps' GE, Tyco, AMD and Intel

Every good value investor seeks to find industries that may be overlooked or viewed unfavorably, as well as those where stocks will rebound.

But it is important to distinguish these opportunities from so-called “value traps,” Merril Lynch strategist Savita Subramanian said in a note to clients.

These “traps” appear to be the real “dogs” of the equity market and are characterized by “industries that appear significantly undervalued relative to their historical multiple, but have deteriorating price and earnings momentum,“ she said, adding that these sectors typically remain “trapped” until an external factor boosts the share price.

“Current value traps represent a broad range of sectors, but are primarily in cyclical industries which typically look inexpensive at the peak of the cycle,” Ms. Subramanian said.

These U.S. market sectors include biotechnology, independent power producers and energy traders, industrial conglomerates, information technology service providers, and semiconductor and equipment makers.

Some of the individual stocks Ms. Subramanian considers stuck in this rut include General Electric Co. (GE, Tyco International Ltd. (TYC), Advanced Micro Devices Inc. (AMD) and Intel Corp. (INTC). They are all rated “neutral” by Merrill.